Hotel chocolat an internationalisation strategy

Hotel Chocolat (HC) was founded over 15 years ago with one goal: to make a better type of chocolate available to UK consumers bored by the “mediocrity of that available…” (Hotel Chocolat, 2009). HC started as a catalogue business. Following the success of this business, the company set up an award winning website with the first of many HC stores appearing on the high.street in 2004. Since its success in the UK, HC has applied an export strategy to the US via an online ordering site. This strategy enabled the company to minimise risk before fully committing to foreign direct investment (FDI). Once adequate demand for the product was assured, HC opened its first American store in Boston and now has plans to further expand throughout North America. There are currently 43 stores located in the UK with an additional 23 operating inside John Lewis’ stores. It is likely that the company has expanded as far as it can domestically and should now focus its attention on international markets.

In order to assess HC’s ability to internationalise the following should be considered. HC is ‘Britain’s fastest-growing private company with 225% sales growth per year (Fasttrack100, 2008) and sales equating to £18 million in 2008. From this, one may infer that HC does indeed have sufficient resources for internationalization. However, it is questionable whether the company is prepared to undertake large-scale investments, due to the self-funding expansion strategy pursued so far.

This essay will now present an internationalisation strategy for HC by applying theory and drawing upon personal contact with the Japanese External Trade Organisation (JETRO), the UK Trade and Investment team (UKTI) and HC representatives, as well as quantitative data from secondary research.

Global figures for chocolate sales provide compelling incentives to further internationalise. In 2008 global chocolate sales were $62.16 billion (Datamonitor, 2009a). Contrasting these figures with the UK shows enormous sales potential. Currently the UK confectionary market is valued at $13.4 billion, with chocolate sales accounting for 67.5%. More tellingly, however, are the records for annual growth of market value between the years 2004-08 (Datamonitor, 2009b) which show a decided slow-down in the rate of growth. Although the economic down turn will have played its role in the calculation of these figures, we can be confident that the UK chocolate industry is operating within the mature stage of the product life cycle. This is problematic for HC as Kotler (2008 p.575) argues: “A slowdown in sales growth results in an overcapacity of competition, which can ultimately lead to a decrease in profits.” Furthermore, the domestic chocolate industry is dominated by Cadbury, Mars and Nestle who collectively hold a 59.8% market share (Datamonitor, 2009c). Expanding internationally into previously untapped markets may be the best solution to leverage any potential losses felt domestically as Hill (2009, p.426) states; “Expanding globally allows firms to increase their profitability and rate of profit growth in ways not available to purely domestic enterprises”.

An essential part of any internationalisation strategy is the country screening process in which hundreds of possible countries must be systematically eliminated. There are numerous ways to do this and, when done professionally, a vast amount of research will be undertaken before any decisions are made. HC, as previously stated, have already begun expansion into North America and have made plans to expand into the Middle East (Retail week, 2009; Walker, 2009). For these reasons, we will not be considering either region. Europe will also be ruled out as the European luxury chocolate market is already highly saturated with rival brands from Belgium, France and Switzerland (RTS, 2009). The next mass filtration stage was to view the political stability scores (CIFP, 2007) of the remaining regions and leave only those scoring highest. This stage virtually eliminated Africa and Latin America, leaving predominantly the Asia Pacific region. Finally, the remaining countries were ranked in order of GDP per capita (CIA World Factbook, 2008) and all but the top eight were eliminated. This left: Hong Kong, Japan, China, Australia, New Zealand, South Korea, Malaysia and Singapore. Scrutinising these eight countries and drawing upon a variety of unequally weighted factors a country attractiveness index was formulated for each. Ultimately Japan was found to be the optimal host country with the greatest index score.

Haak recently published that: “no company can afford to neglect the dynamic Asian economic region” (Haak, 2008 p.1). Within this region, Japan in particular “assumes a key position” (Haak, 2008 p.1) due to its sheer size and its ‘wealthy and sophisticated’ consumers (JETRO, 2008). In order to formally evaluate Japan’s attractiveness as a host country, certain aspects of Dunning’s eclectic paradigm have been applied. Focusing on ownership and location factors; the decision to fully invest in Japan can be justified (Dunning, 1988). Furthermore, location factors can be broken down into three advantages: economic, political and social. Japan is considered a major world financial hotspot with the 2nd highest number of millionaires residing there and household consumption expenditure figures exceeding those of most nations. This goes hand in hand with high consumer purchasing power and a demand for high quality produce. Perhaps one of the strongest reasons for investment in Japan is its potential as a gateway to the Asian-Pacific markets. As these markets grow rapidly, the economic integration between countries in the region continues to strengthen. This links to an ownership advantage that HC can achieve. Entering the Japanese market will allow access to other Asian markets over time and provide economies in both scale and scope. In recent years government policies have become an increasingly important factor affecting FDI (Brewer, 1993). The Japanese government have various foreign investment policies which incentivise investment. Japan, once restrictive of trade, has now shed this image and is attracting increasing levels of FDI. Whereas most national governments focus on financial incentives, the Japanese government follows a 3-step model which provides support for potential investors (Watanabe, 2003). As discussed later in this essay, this type of incentive reduces the need for foreign firms to access local knowledge by means of joint venture (JV) or merger.

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Knowledge of national cultures is commonly seen as “a prerequisite to the effective entry into new markets” (Chinta, Capar, 2007p.213), and is stated as such in the Scandinavian process model. However, various studies have found no support for this hypothesis (Barkema et al, 1996). It could also be argued that Japan is culturally equidistant between all nations, thus rendering the Scandinavian model redundant in this unique case. Ronen and Shenkar (1985) identified eight culturally homogenous blocks of countries, suggesting that firms benefit more from experiences in other countries within the same block. Japan, on the other hand, was not allotted a cluster and according to Barkema et al, (1996), no cultural block is appropriate for Japan. Therefore, Japan was allocated its own exclusive cultural block. This suggests that it would not be possible for a firm to gradually build experiential knowledge for Japan. This would partially support the decision for HC to immediately enter the market. However, this argument suggests that knowledge of Japan would not increase understanding of other Asia Pacific markets, as previously thought. Nevertheless, the extent to which Japan does not belong to some larger cultural block is disputable.

Western investors are often scared off by the uniqueness of the Japanese business model. However, this ‘uniqueness’ can provide a host of opportunities to foreign firms wishing to access Japan’s wealthy consumers (Kensy, 2001). Porter’s diamond theory can be applied to Japan in order to assess its competitive advantage as the host country. In terms of inherent endowments such as land, labour and population size, it may appear that Japan is economically disadvantaged in comparison to large Asia Pacific states such as China. However, Porter argues “a nation’s competiveness depends on the capacity of its industry to innovate and upgrade” (Porter, 1998, p155). Based on these assumptions it can be recognised that a significant national comparative advantage is held by Japan. Immediate competition in the Japanese chocolate market is low but promises to grow significantly (Datamonitor, 2009d). This appeals to both Porter’s 5 forces model and the Diamond model, as it provides easier entry followed by greater pressure to innovate and gain a global advantage.

It is now worthwhile to consider any disadvantages, in order to gain a greater understanding of the risks involved. The Japanese market, as discussed, is one that is culturally unique. Therefore, in order to survive, HC would have to invest time and money reviewing cultural practices and adopt new management styles to suit Japan. Referring to Porter’s five forces analysis, the threat of substitute would seem to be an inherent problem in most markets, with Japan being no exception. Theoretically, HC would expect to face competition from alternative industries in the gift and snack markets. A recent report by Datamonitor (2009d) stated: “confectionery products are vulnerable to the threat from substitutes such as savoury snacks and fresh fruits, due to low switching costs and consumption patterns in different geographies”. In reality, competitive rivalry is deemed as moderate in this market, with branding contributing to a high level of customer loyalty. Therefore, “price elasticity and product differentiation only play a small part in the competitive rivalry of the confectionery market” (Datamonitor, 2009d). According to the electronics maker Canon “Once a company is active in the Japanese market, it is three times harder to fail in business” (Melville, 1999, p.113). However, Melville also notes that: “it is three times harder to become successful in Japan in the first place”.

To summarise; Japan deserves the special attention of international companies, which in recent years have often “neglected this economic heavyweight in an often blind enthusiasm for the Chinese market” (Haak, 2008, p.3). The high GDP and considerable spending power of Japan provides the perfect marketplace for a high quality, innovative product. As long as risks are considered and the market is entered into carefully, there should be no reason why HC cannot reap the benefits.

In an analysis of what motivates firms to move into new markets, Buckley suggests, “there are three key motives: (1) Market seeking FDI, (2) Resource seeking FDI (3) Cost-reduction or efficiency seeking FDI.” (Buckley, 2000 p.146). Buckley also believes that for any firm interested in investing in Japan, one of these key goals must be met. Furthermore, the main motive for any FDI into Japan will typically be market seeking. This is especially the case for any firm producing consumer goods such as HC.

It is essential to understand the competitive landscape of the confectionary market in Japan, in order to formulate an optimal market strategy for HC. Japan’s confectionary market consists mainly of local companies offering a multitude of brands producing chocolate and sugar-based products. 48.1% of the confectionary market is dominated by three companies: Lotte Group, Meji Seika Kaisha, Ltd. and Ezaki Glico (Datamonitor, 2009d). So where can HC fit into this market? Most confectionery products are mass-marketed and manufactured in great volume to reduce costs so as to provide competitive prices whilst making a profit. Potentially, a more cost friendly option for the company is to “enter the market in a small-scope, for example, by making high-value, low-volume products in a craft process rather than a mechanized process.” (Datamonitor, 2009d). Coincidentally, this fits HC’s high quality/exclusive brand image.

Japan’s demographics provide a wide variety of potential consumers for HC. The primary target group is Japan’s ‘silver market’: the older, free spending portion of the population. Japan has an aging population and hence a growing market segment for HC. This group already has high buying power and furthermore, JETRO are forecasting growth of €30billion in the market for senior citizens. Another suitable segment in Japan is that of unmarried women over 30 (Haak, 2008). This group is largely luxury orientated and represents a financially promising market segment for HC to exploit. Moreover, in the experience of the UKTI, Japanese consumers are attracted to products that are healthy, high end and quintessentially British. All of these factors will contribute to HC’s competitive advantage over Japan’s local producers.

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This essay will now discuss the possible strategies that HC could undertake, applying both theory and practical knowledge to formally review all available modes of entry. The mode of entry decision is crucial to any company, as it can have an “ongoing effect on a firm’s international performance” (Chung and Enderwick, 2001 p.443) it is therefore important to formally evaluate all possible modes. International market entry modes can be classified according to level of control, resource commitment and risk involvement (Kim & Hwang, 1992). Table 2 takes these three classifications and applies them to specific modes of entry.

As well as the classifications used in table 2, it is essential to consider culture and how a mode of entry fits in with the company’s long-term objectives. When firms enter into a foreign market, they must contend with the national culture. However, when firms partake in JVs, they face ‘double layered acculturation’ (Barkema et al 1996; Zacharakis, 1993); this can pose problems for a firm and increase the associated risk. JVs also require a great deal of capital, effort and trust. Additionally, JVs with Japanese firms may be particularly risky as “learning effects may be asymmetric … in JVs Japanese managers focus more on learning and less on information sharing…” (Barkema et al, 1996, p.164). Nevertheless, the knowledge needed to operate in a foreign market is not easily acquired, and in the early stages of market entry a native partner is strongly recommended to provide access to local market knowledge.

Therefore, we propose HC should consider an agent distribution model, focusing largely on Japanese department stores. This should not however be the first stage of the internationalisation process. The Uppsala stage model “stipulates organisational learning [through gradual] small steps whereby firms increase their international involvement” up through the establishment chain (Bakema et al, 1996 p.152). In short, Uppsala urges firms to export before they create subsidiaries. Exceptions can be made when firms have ‘experiential knowledge’ from markets with similar conditions, however, as discussed earlier, this cannot be the case with Japan. Therefore, we propose that as a first step, HC should extend their online ordering system by setting up a Japanese version of their website. This will allow HC to measure demand and increase brand awareness in the host market. By using this safe progression, HC will be in a position to both gauge the risks and benefits of the venture while at the same time acquiring cultural knowledge, incrementally increasing levels of exposure to corporate and national culture.

Kim and Hwang, (1992) suggest that a firm’s familiarity with the host market relates to the mode of entry. As previously discussed, Japan is unlike other cultures and any strategy undertaken needs to be low risk and allow the firm to ‘test the water’ with the host market. The use of an agent enables the company to avoid the financial and cultural risks associated with JVs for example. This is a more realistic strategy for HC due to their lack of size and international experience. Additionally, by appointing an agent, HC can retain control over their marketing mix and gain access to existing distribution networks. A crucial consideration when using an agent is to find a local party with a good reputation. Often agents will cover a specific territory and therefore as part of their strategy, HC should select a Japanese city in which to focus their internationalisation strategy. By observing successful moves made by close international competitors such as Godiva, it would seem that Tokyo would most likely be selected (Godiva, 2009). Complications may arise if an agent is working for other companies that have conflicting interests to HC. In order to overcome such potential problems, HC should partake in a ‘due diligence process’. Careful selection criteria should be implemented to ensure that the agent has relevant expertise and appropriate business standing in line with HC’s business interests.

This market entry strategy is further supported when we consider withdrawal and divestment strategies. As Buckley notes, “It is important for a firm to choose, at the outset, strategies whose exit costs are low” (Buckley & Casson, 1998, p.39). It is widely known that agent distribution models have low withdrawal costs relative to JVs, mergers and the like. By starting at the end and securing a strong exit strategy HC can significantly reduce the impact that would be felt by the organisation were the venture to fail.

In conclusion, based on theory and the practical advice gained from a personal meeting with the UKTI, HC should first provide a Japanese version of their website in order to export to Japan whilst gaining knowledge of the local market and consumer demand. Once adequate demand is ensured, HC may proceed to employ an agent in order to develop brand recognition before finally opening a store in Tokyo. Since HC currently has a strong relationship with the UK department store John Lewis, it might be suitable for HC to pursue a similar strategy in Japan by joining a high-end department store, possibly with branches in other Asia Pacific locations. If the model proves to be successful, then by being in Japan, HC can reach other Asia Pacific locations, which, although not close in cultural space, are linked by a network of department stores.

It is important to discuss the limitations of this report and offer suggestions for further study. One fundamental limitation of this report lies within the country screening process. It was only possible to base the primary stages upon political stability rankings, whereas it would be far better practice to cross reference a larger number of factors. Also, for the sake of originality it was not sensible to include any regions that HC had already considered. In doing this we may have disregarded some very appropriate locations. Factors such as cultural differences required proxies that, naturally, come with a degree of inaccuracy. The proxy used to estimate cultural distance was the percentage of British expats in the target locations. The power of this proxy is well supported, however, it is clearly arguable and a more powerful proxy could be employed with detailed national studies that could take into account: institutional style, business practices, media, etc. During the market analysis of the chocolate industry it was not possible to find specific data on the high quality chocolate industry performance, therefore, it was only possible to approximate levels of luxury chocolates being produced and consumed in both the UK and Japan.

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Finally, in a recent Financial Times presentation (Rowe, 2009) it was explained that ‘you really have to walk the streets’ of the country to get a feel for what is the most suitable mode of entry. Theory and second hand knowledge of a country can only play a limited role in both the country screening process and mode of entry choice. In reality, a company should never base business decisions on secondary research alone.

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