International Marketing: Cases form Malaysia 9789814379045

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INTERNATIONAL MARKETING Cases from Malaysia

The Institute of Southeast Asian Studies was established as an autonomous organization in May 1968. It is a regional research centre for scholars and other specialists concerned with modern Southeast Asia, particularly the multi-faceted problems of stability and security, economic development, and political and social change. The Institute is governed by a twenty-one-member Board of Trustees comprising nominees from the Singapore Government, the National University of Singapore, the various Chambers of Commerce, and professional and civic organizations. A ten-man Executive Committee oversees day-to-day operations; it is chaired by the Director, the Institute's chief academic and administrative officer. The ASEAN Economic Research Unit is an integral part of the Institute, coming under the overall supervision of the Director who is also the Chairman of its Management Committee. The Unit was formed in 1979 in response to the need to deepen understanding of economic change and political developments in ASEAN. The day-today operations of the Unit are the responsibility of the Co-ordinator. A Regional Advisory Committee, consisting of senior economists from the ASEAN countries, guides the work of the Unit.

INTERNATIONAL MARKETING Cases from

Malaysia

SIEH LEE MEl LING

INSTITUTE OF SOUTHEAST ASIAN STUDIES

Institute of Southeast Asian Studies Heng Mui Keng Terrace, Pasir Panjang, Singapore 0511

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Institute of Southeast Asian Studies. ISBN 9971-988-03-8

© 1985 Institute of Southeast Asian Studies, Singapore First published 1985

To my husband, Lawrence Sieh Siao Fung, and daughters, Louie and Luanne

Contents

Case Reference Table Preface

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Case 1 Case 2

Case 3

ooooooooooooooooooooooooooooooooo

Sin Fatt Frozen Foods Sdno Bhdo (Part I) PRICING FOR INTERNATIONAL MARKETS Sin Fatt Frozen Foods Sdno Bhdo (Part II) ANTICIPATING BANS BY IMPORTING COUNTRIES

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1

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7

Seri Chempaka Sdno Bhdo 11 EXPORTING TO ABSORB EXCESS CAPACITY Sleek Cane Sdno Bhdo (Part 1) STRENGTHENING INTERNATIONAL MARKETING 25 AGIVITIES THROUGH EXPANSION oooooooo

Case 4

ooooooooooooooooo

Case 5

Sleek Cane Sdno Bhdo (Part II) SEGMENTING THE TARGET MARKET IN CANADA Sleek Cane Sdno Bhdo (Part Ill) HEDGING AGAINST INTERNATIONAL FINANCIAL RISKS Sedap (Malaysia) Sdno Bhdo (Part I) IMPROVING THE PRODUG OF AN OVERSEAS SUBSIDIARY Sedap (Malaysia) Sdno Bhdo (Part II) POSITIONING AND PROMOTING INTERNATIONALLY

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47

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55

ooooooooooooooooooooooooooooooooo

Case 6

Case 7

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Case 8

oooooooooooooooo

ooooooooooooooooooooooooooooooooo

Case 9 Case 10

Anggerik Sdno Bhdo (Part I) ANALYSING DECLINE IN EXPORT SALES Anggerik Sdno Bhdo (Part II) PLANNING FOR NEW INTERNATIONAL DISTRIBUTION STRATEGY

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0000 0 o 0 0 0 0 o o 0 000 000 o o 0 0 0000 0000

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77 79

89

CASE REFERENCE TABLE Case No.

Company

Industry

Market Location

Aspects of Marketing

Sin Fott Frozen Foods Sdn. Bhd. {Port I)

Frozen prawns

USA, Australia, France, Netherlands, UK

Pricing policies and strategies; inflationary pressures; supply variation; quality standards; seasonality of demand

2

Sin Fatt Frozen Foods Sdn. Bhd. (Part II)

-ditto-

-ditto-

Product quality; health requirements; buyers' complaints; import ban

3

Seri Chempaka Sdn. Bhd.

Ceramic wall tiles

Singapore

Market share; marketing mix; competition

4

Sleek Cane Sdn. Bhd. (Part I)

Cane furniture

USA

Resources for production; product image; new market evaluation; competition

5

Sleek Cane Sdn. Bhd. (Part II)

-ditto-

Canada

Market planning; market entry; segmentation

6

Sleek Cane Sdn. Bhd. {Part Ill)

-ditto-

France

Effects of devaluation; financial risks; credit to importers and final buyers

7

Sedap (Malaysia) Sdn. Bhd. (Part I)

Cake mix

Malaysia

Market research; new product; market entry strategy

8

Sedap (Malaysia) Sdn. Bhd. (Part II)

Cake mix

Malaysia

Universality concept in marketing; cultural differences; product image and position; advertising theme

9

Anggerik Sdn. Bhd. (Part I)

Fresh cut orchid flowers

Singapore, Western Europe, Others

Strategy for export; control; price; distribution; competition from neighbouring countries

10

Anggerik Sdn. Bhd. (Part II)

-ditto-

Netherlands, Switzerland, Australia, Federal Republic of Germany, Canada, Sweden, Kuwait

Distribution planning; market research and information

Preface

My interest in problems encountered by Malaysian firms that engage in international marketing and export activities goes back to the late seventies when I was asked to conduct a survey of Malaysian exporters for the International Trade Centre UNCTAD/GATI, Geneva. It did not take long for me to realize that Malaysian companies face rather different problems in their attempt to make inroads into foreign markets when compared with firms operating from developed economies. In view of the official encouragement to export and market overseas, it is clear that the management skills needed to deal with problems on the international scene had to be developed. This collection of cases represents a small effort towards the development of managerial manpower in the area of international marketing. Although the case method is an important tool that may be deployed in any management development programme, realistic cases based on Malaysian firms which are more beneficial for users in this part of the world are certainly difficult to come by (apart from my earlier casebook, Marketing Management Cases in Malaysia [Kuala Lumpur: Longmans, 1979], which does not include international marketing). On the other hand, in preparing the material for this volume, I have been mindful of the reality that the case method is but one of the several pedagogical tools for management training and education. In other words, the cases are expected to be used along with other methods of instruction such as lectures, seminars, syndicate work, games, etc. Reliance on the use of the cases alone for any course in international marketing would be far from adequate. Also, students are expected to be familiar with basic concepts of marketing, strategy, and policy as well as differences between domestic and international marketing when using the cases. xi

XII

PREFACE

To help users in the choice of material included in this publication, a Case Reference Table is provided immediately after the Contents page to indicate the main variables or areas involved in each case. Specifically, it is hoped that the cases will contribute towards the development of analytical and decision-making capabilities amongst executives and business students alike. Lastly, I would be ungrateful if I failed to express my gratitude to the companies and their management, whose names have been disguised, for their time and co-operation; to the University of Malaya for funding the field research; to my MBA class in International Marketing at the University of Malaya for part of the data collection; to colleagues who have tested earlier drafts of the cases; to Professors Richard Holton and David Aaker of the Graduate School of Business, University of California, Berkeley for their encouragement and help; to the Institute of Southeast Asian Studies, Singapore for facilities at the final stages of the project; and to my brother Dr Selwyn Lee and my parents Mr & Mrs S.T. Lee who accommodated me during my stays in California and Singapore respectively. To these people I am heavily indebted. Needless to say, the usual disclaimer on errors applies.

July 7984

SIEH LEE MEl LING

CASE 1

Sin Fatt Frozen Foods Sdn . Bhd. {Part I)

Pricing for International Markets The management of Sin Fatt Frozen Foods is currently reviewing the company's pricing policies and practices after having been in operation for nearly four years. As the company is adopting a growth strategy in terms of production and marketing, the present method of pricing is thought to be inadequate.

Company Background Sin Fatt was initiated by a group of seven businessmen with considerable experience in export marketing. Three of them are members of the Chan family clan. With a paid-up capital of M$140,000, the company functions primarily as a middleman by acquiring prawns from local fishermen and exporting them overseas. lost year, a record sales figure of M$3.5 million was achieved. Plans are underway to export cuttlefish, squid, cockles, and other seafoods in the near future. Thus far, the company has been hiring working space from Utara lceworks at Butterworth where the processing of prawns is carried out. Fresh prawns are usually graded, cooked, peeled, ice-packed, and stored before being shipped abroad. An administrative-cum-sales office is maintained at the New Chain Ferry Complex of Butterworth. Altogether the company has thirty employees on its payroll. Sin Fatt purchases two tons of fresh prawns a day on average, from the fishing villages of the northern region and from Perak. Prices are paid according to species and size. Though some of the prawns are washed, frozen, and exported raw, most of them are cooked, peeled, and frozen before being sent overseas. Uncooked prawns are usually exported within a period of five days whereas cooked ones are exported after two weeks to a month. At present, fresh, frozen prawns l

2

INTERNATIONAl MARKETING

are packed in cartons according to health requirements stipulated by the Malaysian authorities. They are sold to importing agents or to food processors and canneries in the United States, Australia, France, the Netherlands, and Britain. Attempts to enter the lucrative Japanese market have been unsuccessful. Exhibit 1.1 summarizes the major buyers of fresh, frozen prawns exported from Malaysia.

EXHIBIT 1.1 Maior Buyers of Fresh, Frozen Prawns Exported from Malaysia 1971

1977

---~-~--

Country Australia Hong Kong Japan Netherlands United Kingdom United States Others Total

Tons

M$'000

-----------

Tons

M$'000

658.6 545.4 7,061.7 451.8 1,971.9 276.2 1,126.0

4,155 2,367 42,734 2,367 11,201 1,583 4,092

1,497.2 124.0 5,355.4 1,780.7 3,543.0 522.2 1,376.8

13,289 718 63,815 10,440 22,954 4,393 9,112

12,118.6

68,497

14,199.3

124,721

Source: Malaysia, Malaysia Annual Statistics of External Trade, Vol. 1,1971, 1977 (Kuala lumpur: Department of Statistics).

Pricing Practice In view of the intense competition on two levels, namely amongst Malaysian exporters (approximately fifty firms) and amongst producers from other countries such as Thailand, Korea, and Taiwan, Sin Fatt cannot but offer the lowest possible price to remain in business. Exhibit 1.2 shows the basic price quotations of the company's products as at l January 1980. It is the company's policy to maintain a markup of 5 to 6 per cent whilst trying to attract foreign buyers through non-price strategies. They include methods that emphasize the building of goodwill such as ensuring "good weights", quality, and sizes.

3

Pricing for International Markets EXHIBIT 1.2 Sin FaH's Basic Export Prices of Fresh, Frozen Prawns as at 1 January 1980 Species/Size

US$

Per Per Per Per Per Per

2.50 2.30 2.00 1.70 1.40 1.20

lb. lb. lb. lb. lb. lb.

of of of of of of

tiger prawns* size 90-120 size 120-200 size 200-300 size 300-500 (smallest) size 500-800

* Local name: Udang Harimau. Scientific name: Penaeus mondon or Penaeus semisulcatus. Nevertheless, the company faces a number of difficulties in the determination and administration of price for its export markets. They are summarized as follows: 1. Variation in the cost of fresh prawns. During the rainy seasons, the cost of fresh prawns increases due to poor catches. As the increase is passed on to the foreign buyer, negotiation for export becomes difficult. The problem is aggravated by the fact that when catches are good, foreign buyers do not benefit from lower prices because extra prawns are sold in the domestic market. 2. Fluctuation in currency rates. As prices are quoted in U.S. dollars whilst fresh prawns are purchased in Malaysian dollars, adjustments to prices have to be made whenever the exchange rate for the U.S. dollar changes. 3. Seasonality of demand. Sale of frozen prawns tends to drop to extremely low levels during the winter months in markets such as Canada, the United States, and Australia. Moreover, demand tends to vary directly with the buoyancy of the world economy in general. 4. Delays attributable to inflationary pressures. As final prices are determined through negotiation, new orders

4

INTERNATIONAL MARKETING

from importers had to be postponed whenever costs increased. With the continual upward revision in the costs of shipping, handling, loading, cold chain storage, labour, etc., sales suffered whilst awaiting the outcome of the bargaining rounds. 5. Price administration. The management of Sin Fatt feels that their current practice with respect to the manner in which basic prices are varied according to type of buyer, location of market, quantity and time of purchase are not satisfactory because decisions are left almost entirely to the company's representative conducting the negotiation.

Other Information In the course of the review, the following information on the industry in Malaysia was obtained: 1. For the last 10 years, the seafood industry constituted the sixth most important export industry of Malaysia in terms of value, after rubber, wood, petroleum, tin, and palm oil. In 1977, the country exported M$218 million worth of seafood (compared with M$124 million in 1971 ). Of the total, 73.3 per cent was exported from Peninsular Malaysia, 16.6 per cent from Sabah, and 10.1 per cent from Sarawak. 2. Fresh frozen prawns accounted for M$124.7 million, i.e., 57.2 per cent of all seafood exported in 1977. By 1979, export value of the product exceeded the M$200 million mark. In fact in 1980 Malaysia exported 22, 128 tons of fresh frozen prawns valued at M$225.6 million. 3. From a recent study covering nearly 50 per cent of similar exporting companies in Malaysia, the management of Sin Fatt further learnt that other Malaysian exporters in the industry consider that low profitability and high transportation cum storage costs constitute the two major constraints limiting the development of the industry. There is also an expressed indication that export assistance in the form of information on overseas markets is strongly desired. Further, Malaysian exporters sell

Pricing for International Markets

5

mainly through import agents or commission sales agent, whilst samples and direct mail are the most commonly used methods of promotion. Nearly all exporters pack their frozen prawns in cartons and employ letters of credit as the main transactional medium. 4. Despite the slight decrease of frozen prawns from Malaysia in 1974-75, caused by the economic recession of importing countries, the industry has since recovered and is heading towards rapid growth. However, it is acknowledged that Malaysian processors of frozen prawns must guard against the deterioration of the quality of their products to ensure a high level of export sales. Secondly, the industry has to give serious consideration to the threats of a dwindling supply of prawn catches and the possibilities of exporting aquacultured {fresh-water) prawns to their overseas buyers.

Questions 1.

In view of the problems faced by the industry in general and Sin Fatt in particular, what do you think are the areas that may be controllable to some extent by the management of Sin Fatt? 2. Evaluate the company's existing method of pricing for the overseas market and recommend steps for improvement. 3. Health safety standards are sometimes regarded as a Non-Tariff Barrier in international trade. In view of the nature of frozen seafood products, in what ways can Sin Fatt prepare itself in anticipation of such a NTB?

NOTES

CASE 2

Sin Fatt Frozen Foods Sdn. Bhd. (Part II)

Anticipating Sans by Importing Countries Towards the end of 1983, the management of Sin Fatt Frozen Foods was disturbed by the increasing number of complaints from their overseas buyers regarding the quality and size of frozen prawns supplied by the company. Despite growing demand from the United States and Europe, Mr L.T. Chan who was responsible for international markets expressed the fear that Sin Fatt would stand to lose if the complaints were handled as before, that is, as and when they were received without fundamental adjustments towards a long-term solution. In fact, Mr Chan gathered that other frozen prawn processors and exporters in Malaysia were also facing many of the same problems and were also anxious to find ways of dealing with buyers' dissatisfactions.

Short Weights A common complaint of importers purchasing frozen prawns from Malaysia is that the prawns received are smaller and lighter than specified. Although attempts have been made to explain that prawns tend to shrink when frozen over a long period and that it is difficult for exporters such as Sin Fatt to estimate the extent of shrinkage for each consignment to various destinations at the time of packing for the purpose of making allowances, both importers and exporters have not found a solution to the problem. Consequently, it is not uncommon for importers to make large financial claims for "short weights". Mr Chan feels that such claims are often unjustified and they cause unnecessary paperwork. Of greater concern to Sin Fatt is that frequent and sizeable claims erode into the already small margin derived from exports. 7

8

INTERNATIONAL MARKETING

Deterioration of Quality The quality of frozen prawns is judged by at least six factors: colour, flavour, odour:. texture, size, and species. Generally, prawns with an intense pink or orange colour are preferred over those that are pale, white, or greyish. A fresh, richer taste is preferred because prawns that leave a flat taste are believed to have exceeded their "shelf-life", and are hence not suitable for human consumption. Also, stale prawns are known to emit a strong, fishy odour that aggravates into a stench that is hard for consumers to accept. Fresh prawns of good quality are best tested by the firmness of the bite. Normally, a soft, pulp-like texture is regarded as poor. Finally, larger sized prawns tend to command a price premium over smaller ones even of the same species. To ensure high quality, it is of utmost importance for processors, such as Sin Fatt, and handlers such as shippers, to maintain a cold chain of minus 18° Centigrade until the prawns reach the hands of the consumers. Basically, continuous coldroom facilities are necessary to minimize enzymatic and bacteriological action. The bacteria count of water and ice used in the final stages of processing and pocking prior to cold storage is also considered an important factor. It is widely known that entire shipments of frozen prawns, including some from Malaysia, have been rejected by health authorities of importing countries due to high bacteria count. Mr Chon is not happy when overseas buyers try to reduce the supply price because of deterioration of quality. He believes that it is impossible to apply objective standards except for readily measurable variables such as weight, size, bacteria count, and species. Moreover, as with most agro-based industries, supply of specific species of particular sizes tends to fluctuate with climatic and other natural conditions. Inspection of samples is also difficult unless undertaken by purchasing agents near the source of supply.

Species It is not uncommon to receive complaints that the type of prawns in a particular consignment is not comparable to or is dissimilar from that of previous shipments. Secondly, even if prawns ore of a similar class, buyers sometimes complain that they are smaller than expected.

Anticipating Bans by lmpor1ing Countries

9

Moreover, exporters are sometimes accused of mixing prawns from a different, less expensive class in times of shortage, just to maintain business. Mr Chan contends that Sin Fatt is not unscrupulous as some of the overseas buyers may imply. He explains that there are nine classes of prawns that are of commercial importance obtainable from Malaysian waters. However, the nine classes comprise a total of eighteen species. The best species come from only six classes and it is these that are exported. For each consignment, price varies with species and size, according to the number of prawns of a species per pound weight. Therefore, it is not surprising that prawns of a particular species but of a slightly different size {than before) are sold where variation in size is taken care of by price adjustments. Also, Mr Chan explains that regular importers who are aware of the practice of "making-up" to the required quantity with prawns of the same class though of a different species, usually do not express dissatisfaction because of three reasons. First, they understand that it is not the intention of Sin Fatt to adulterate the goods because making-up takes place only in unforeseeable and unavoidable circumstances. Secondly, regular importers prefer to accept whatever their suppliers can lay their hands on especially in the off-season rather than be unable to fulfill their commitments down the distribution chain. Thirdly, Mr Chan emphasizes that "old", regular importers appreciate the importance of mutual trust when dealing with Sin Fatt. In other words, difficulties regarding species and size are mainly encountered with new or occasional buyers who are not familiar with the Asian way of doing business. Admittedly, such misunderstandings do take up an excessive amount of executive time.

Import Ban

As Mr Chan was reading his New Straits Times newspaper one morning in early 1984, he learned that the Netherlands had imposed a ban on the importation of prawns from Bangladesh. The action was officially attributed to fatal cases of food poisoning after consumption of prawns from Bangladesh. Whatever the reasons for the ban, the report gave Mr Chan a jolt. Questions began flashing across his mind,

10

INTERNATIONAl MARKETING

for could this be the beginning of what he had been dreading for some time? Would the ban spread to other countries and reach Malaysian shores?

Questions 1. What are the issues that Mr Chan should address, having learnt of the ban against Bangladesh? 2. What information would you suggest he examine before taking any action and how do you think he can obtain such information? 3. In an industry that is relatively volatile in terms of quality, price, supply, etc., how should a seller in the international market go about minimizing risks? 4. Recommend a course of action for Sin Fott on the international scene in anticipation of an import ban.

NOTES

CASE 3

Seri Chempaka Sdn. Bhd.

Exporting to Absorb Excess Capacity Seri Chempaka Sdn. Bhd., the leading manufacturer of quality ceramic 1 wall tiles in Malaysia, has increased its production capacity well in excess of the requirements of the domestic market. The company has therefore started to export overseas. However, there are clear indications that initial successes, especially in the Singapore market, are becoming more difficult to maintain. Encik Rahman, the marketing manager, feels that time and effort should be expended to review the situation in Singapore before Seri Chempaka is left behind. He personally believes that remedial steps can be taken to salvage some of the company's share of the Singapore market that has been lost to competitive sources of supply.

Seri Chempaka Sdn. Bhd. The company located in the Senawang Industrial Estate near Seremban was established in April 1976 as a joint venture between three Malaysian companies on the one hand and Barnes Leroy Tiles Ltd. of Britain on the other. As a subsidiary of a large, reputable multinational corporation deeply entrenched in rubber related industries, Seri Chempaka grew rapidly under a team of able managers. Its second expansion programme that was recently completed raised production capacity by 25 per cent from 185,800 square metres a month to 232,250 square metres a month. It is therefore not surprising that Seri Chempaka is the largest manufacturer of wall tiles in Southeast Asia with a workforce of over 500. Utilizing British technology and expertise from Barnes LeroYt a leading wall tile manufacturer in Britain, Seri Chempaka turns out three main lines of ceramic tiles for walls. They are the plain white, the plain 11

EXHIBIT 3.1 Exports of Ceramic Tiles from Malaysia (M$ f.o.b.) Glazed Tiles Destination Australia Brunei Burma France Hong Kong India Indonesia Ireland, Rep. of Japan Liberia Mauritius Oman Papua New Guinea Qatar Singapore Other Countries Total

1979

1980

1981

Unglazed Tiles

1982

1979

1980

1981

1982 4800

400 5258

24881 12619

400

5951 29723

55029

19255 30

9950 20796

21600

27188 14232

17187 33 6021 20473

37400

13785

582942

90853

16393

74098

6887 2965103 1920

1197299 10925

3130 218166 2710

134421

620742

110296

16393

98979

3046998

1284853

290662

172935

Source: Department of Statistics, Malaysia.

Exporting to Absorb Excess Capacity

13

coloured, and the decorative lines. At present, seven separate colours and eleven different designs are produced. The company expects to turn out additional colours and designs in the future, to meet market demand. Although tiles of only one size (that is, 108mm X 105mm) are manufactured, decorative tiles may be arranged to form patterns of 216mm square. In the Malaysian market, Seri Chempaka's plain products are sold at M$0.40 each, whilst coloured and decorative tiles are priced at M$0.80 and M$1.50 respectively. In general, prices for international markets are set at levels below those in the domestic Malaysian market. In spite of the lower prices, Seri Chempaka has difficulty competing price-wise with producers of other countries because production costs in Malaysia are inevitably kept high first by the escalating costs of imported frit, an important raw material input, secondly, by the increasing cost of fuel/ and thirdly by rising wages in Malaysia. 3 Overseas importers usually settle transactions with the company through letters of credit, without any further credit extension. In both Malaysia and foreign markets, Seri Chempaka depends on agents and distributors to sell its products. Promotion overseas is limited to catalogues, samples, and photographs sent to importers or commission agents at regular intervals.

The Largest Foreign Market: Singapore Singapore is the largest buyer of ceramic wall tiles, both glazed and unglazed that are exported from Malaysia. They are either used domestically or re-exported. Other less important markets include the Republic of Ireland, Hong Kong, Australia, France, and Indonesia, as shown in Exhibit 3.1

The Construction Industry Import of ceramic tiles into Singapore is closely related to the bouyancy of the construction industry in the Republic. Recent activities of the building industry are summarized in Exhibit 3.2 which indicates the number of buildings commenced, under construction, and completed in the private and public sectors between 1976 and 1980; and in Exhibit 3.3 which provides a breakdown by type of building for the same period. Within the eighties, the industry is expected to expand

14

INTERNATIONAL MARKETING

further as several major projects will be completed. They include the multimillion Sumitomo complex, the S$900 million Raffles City, the S$600 million complex at Marina Centre, many office-cum-shopping centres, and residential buildings. In terms of units, flats constitute the most important type of building constructed in Singapore. This is not surprising since 77 per cent of the population live in Housing and Development Board (HOB) flats. That the Housing and Development Board of Singapore, a government authority, has been highly successful in the planning and development of new towns and housing estates is well known. The Board's responsibilities include not only the construction of public housing under the home ownership programme but also the provision of facilities for commerce, sports, social, and other purposes.

EXHIBIT 3.2 Number of Buildings Commenced, Constructed, and Completed in Singapore, 1976-80 Year

Total

Private Sector

Public Sector

1976 1977 1978 1979 1980

129,140 130,791 119,020 108,185 94,606

11,352 10,089 11,939 11,554 14,294

117,788 120,702 107,081 96,631 80,312

Source: Survey on Demand for Ceramic Tiles in Singapore carried out by the International Trade Centre UNOAD/GATI, Colombo, 1982.

Market Characteristics and Potential The overall market for ceramic tiles is expected to grow between 12 and 14 per cent annually in the first half of the 1980s. Estimates of requirements from foreign suppliers for 1983 and 1984 are shown in Exhibit 3.4. Generally, the use of ceramic tiles facilitates maintenance, provides a cleaner and brighter surrounding, and suggests a more modern living environment. However, two major segments may be distinguished in the Singapore market, namely, the high quality segment and the medium-to-low quality segment.

EXHIBIT 3.3 Types of Buildings Constructed in Singapore in Units,

1976-80 Non-Residential

Residential Bungalows, Semi-Detached, & Terrace

Public 1976 1977 1978 1979 1980

Sector 10 -

-

-

Private Sector 1976 3,606 3,124 1977 1978 2,757 1979 2,771 3,259 1980

Flats

Shophouses

Commercial

Industrial

Educational Total

112,335 111,535 99,313 90,020 71,449

1,710 3,030 2,013 1,603 1,391

1,702 2,227 1,761 1,205 2,360

1,553 3,527 3,691 3,458 4,780

55 48 40 37 80

117,365 120,367 106,818 96,323 80,060

6,770 5,963 7,979 7,334 9,502

77 57 33 33 37

330 286 291 347 350

449 520 764 893 967

35 14 12 25 36

11,267 9,964 11,836 11,397 14,151

Source: Survey on Demand for Ceramic Tiles in Singapore carried out by the International Trade Centre UNOADIGATT, Colombo, 1982.

16

INTERNATIONAL MARKETING

EXHIBIT 3.4 Estimated Import Requirements of Ceramic Tiles into Singapore Annual Growth rate

Tiles for floor and wall (unglazed) Square wall tiles (glazed) Other glazed tiles

Quantity in Tonnes ----------------

%

1982

1983

1984

2 20 15

20,978 59,438 43,674

21,400 71,400 50,200

21,900 85,600 57,800

Source: Projections based on Singapore Trode Statistics for past years.

Major buyers in the high quality segment include developers of large international hotels, prestigious condominiums, bungalows, and town houses. They account for nearly all the decorative glazed tiles sold in Singapore. Such tiles are imported mainly from Japan, Europe, and the United States. With the rising standard of living in a rapidly growing economy, it is not surprising to find the high quality segment growing in size. It is also known that tiles of soft, pale colours with abstract designs are in vogue, as buyers think that such designs possess longlasting appeal and are able to withstand rapid changes in fashion. White and plain-coloured tiles are purchased mainly by the mediumto-low segment. As expected, this segment is larger than that for high quality decorative tiles in value and in tonnage. The HDB is certainly one of the most important buyers. Others include builders of industrial and commercial buildings such as factories, shophouses, and office blocks. It is found that tiles for this segment, despite their reasonably high quality, are regarded as "merchant type" and are low priced. They are primarily supplied by Sri Lankan, Filipino, Malaysian, and Thai manufacturers. Viewed from another angle, tiles of either quality segment may be categorized as plain glazed {that is, white or coloured), non-plain glazed {that is, decorative), and unglazed. See Exhibit 3.5. Although unglazed tiles are usually less expensive than glazed products and decorative tiles are more expensive than plain ones, imports of unglazed tiles into Singapore increase less rapidly than glazed tiles that are plain or decorative, hence reflecting the growing affluence of the Republic as well as the preference towards glazed, decorative

EXHIBIT 3.5 Total Imports of Wall and Floor Tiles into Singapore, 1980-82 Plain Glazed

Non-Plain Glazed

Unglazed

Year

Tonnes

S$1 000 c.i.f.

Tonnes

S$1 000 c.i.f.

Tonnes

S$1000 c.i.f.

1980 1981 1982

32,482 37,534 59,438

36,606 42,574 54,522

40,138 37,629 43,674

50,370 46,837 47,374

19,555 20,550 20,978

19,414 20,811 20,809

Source: Singapore Trade Statistics, 1980-82. Note: S$1 is approximately equivalent to M$1.10.

INTERNATIONAL MARKETING

18

EXHIBIT 3.6 Imports of Wall and Floor Tiles into Singapore by Major Suppliers, 1980-82 1982

Year Plain Glazed Countries Italy Japan China, Rep. of Germany, Fed. Rep. of Spain United Kingdom Philippines Malaysia (Peninsular only) Thailand Korea, Rep. of Brazil Hong Kong Sri lanka Taiwan Czechoslovakia Sweden Fro nee

Non-Plain Glazed

Plain Glazed

Unglazed

Tonnes

S$1000 c.i.f.

Tonnes

S$1000 c.i.f.

Tonnes

S$1000 c.i.f.

Tonnes

S$1000 c.i.f.

21,559 24,494 711

20,198 20,216 613

32,892 2,698 76

35,353 4,528 104

8,900 4,917 2,327

9,492 5,169 942

13,673 10,429 339

15,493 12,446 250

3,694 1,481 117 1,446

4,860 1,332 178 1,336

569 1,843 19 109

833 2,050 29 185

2,267 393 692 25

2,777 250 566 33

1,925 1,876 80 2,864

2,568 1,811 119 3,083

62 1,231 395 422 105 114 1,343

165

1,028 437 44 122 2,557 662

45 1,486 328 296 69 130 1,616

142

819 485 35 78 3,046 572

42

28

717 560

967 635 318 2,898 932

31 5

13

82

48 124 83 126 318

327 3,185 813

17 56

57 104 110 127 287

106

166

Source: Singapore Trade Statistics, 1980-82. Note: S$1 is approximately equivalent to M$1.10.

tiles. Statistics in Exhibit 3.6 indicate that manufacturers from Italy, Japan, West Germany, and Spain dominate the glozed tiles market of Singapore. These some countries ore also important suppliers of unglazed tiles. The Republic of Chino features as a Iorge exporter of cheap, unglazed products to Singapore.

Trade Practices in Singapore Foreign manufacturers usually market their tiles in Singapore through appointed sole agents as well as through importers-distributorswholesalers. Agents handle about two-thirds of all imported tiles whilst importers-distributors account for the remaining one third. It is not uncommon to find agents in Singapore who also oct as importers, distributors, and retailers. On average, approximately half of the tiles

19

Exporting to Absorb Excess Capacity

EXHIBIT 3.6- Continued 1980

1981 Non-Plain Glazed Tonnes

S$1000

Plain Glazed

Unglazed Tonnes

S$1000

Tonnes

Non-Plain Glazed Tonnes

c.i.f.

c.i.f.

c.i.f.

S$1000

S$1000

Unglazed Tonnes

S$1 000 c.i.f.

c.i.f.

27,340 3,986 289

33,276 6,001 380

10,053 2,217 2,570

10,022 2,768 1,986

11,448 6,697 768

13,465 8,552 540

29,392 2,934 59

36,395 4,579 82

5,383 2,036 2,676

4,817 2_497 2,232

193 2,692 36 1,457

516 2,835 61 1,655

2,167 489 354 293

2,537 411 399 352

2,420 1,867

4,098 1,793

2,071

1,856

289 4,127 270 990

608 4,737 318 1,111

3,605 372 416 777

3,739 311 419 851

34 147 517 123 158 112 122

56 175 665 211 124 94 170

187

261

1,117

1,316

1_427 118

84 248 423 469

lOB

1,573 85

292 385 620

192

164

127 4,371 286

105 3,358 322

401 187

432 282

14 186

29 329

54

161

661 684 363 356

1,021 524 388 369

113

92

111 296 413 228 282

104 176 323 220 260

distributed through appointed agents are sold to private contractors and developers, about a fifth are sold to retail outlets such as specialist tiles and hardware shops, 4 another 20 per cent are sold directly to end users,S whilst 10 per cent goes to distributors-wholesalers. Exhibit 3.7 summarizes the distribution structure for ceramic tiles in Singapore. Under normal circumstances, agents carry stocks sufficient for 60 to 90 days. For their services, agents ore paid commission that varies from 15 to 20 per cent of the value of the product. Provision of advice, distribution of sales literature, brochures, catalogues, and samples are part of the routine functions of the agents. Promotion in the form of participating in exhibitions at the World Trade Centre, displays at trade commissions, and direct mail campaigns are .also carried out by agents in conjunction with their principals. With respect to media promotion, advertising in local magazines on interior decoration, in publications for the building industry, and in Singapore dailies is sometimes utilized. However, advertising is not extensively used, except for limited periods in the case of new entrants.

EXHIBIT 3.7 Structure of Distribution Channels in Singapore for Ceramic Tiles 34%

Supply by Domestic Manufacturer

Supply by Foreign Manufacturer

f-----

16% li

\ ~

r-

--

Importers/ Distributors/ Wholesalers

10%

Appointed or Sole Agents

-

20%

20% 50% I

HOB

-

local Contractors & Developers

(on tender or contracts)

I

.:--,

.:::-,

Tiles and Hardware Outlets (Retailers)

End-Users

Source: Survey on Demand for Ceramic Tiles in Singapore carried out by the International Trode Centre U NCT AD/GATI, Colombo,

1982.

Exporting to Absorb Excess Capacity

21

Importers of tiles to Singapore do not face any restrictions on imports nor pay customs duties. Without foreign exchange control, overseas transactions are normally settled by letters of credit or through documents against acceptance for 30, 60, or 90 days. Suppliers from Malaysia, however, are sometimes paid by out-station cheques.

Competition

From Singapore: HOB Tileworks The HDB Tileworks owned by the Housing and Development Board is the only local company manufacturing ceramic tiles in Singapore. 6 With a capacity to produce 700,000 square metres of tiles per annum in the early 1980s, the company concentrates on plain white, 108mm square tiles only. The Housing and Development Board absorbs 60 per cent of the company's production whilst the balance is sold to distributors in the trade. However, there are signs to suggest that with rising costs it is difficult for the HDB Tileworks to compete with imports.

From Malaysia: Petaling Tiles Sdn. Bhd. Petaling Tiles is the only other manufacturer of wall tiles in Malaysia. A wholly Malaysian-owned pioneer in the industry, the company was incorporated in 1968. Located in Selangor, Petaling utilizes Italian technology in its production. Its initial capacity of 64,000 square metres per month has been increased to 93,000 square metres per month over the years. With the primary objective of catering to the needs of the Malaysian market, 90 per cent of Petaling's output are plain white tiles. Coloured tiles constitute only 10 per cent of its production. However, to complement the company's line of plain tiles, Petaling has started to manufacture some decorative tiles on a limited scale. Domestically, "comparable products of both Petaling and Seri Chempaka are retailed at the same price levels. As in the case of Seri Chempaka, Petaling also relegates its selling functions to distributors who receive a 10 per cent margin in return. Both companies together account for 90 per cent of the wall tiles required in Malaysia, with Seri Chempaka supplying 55 per cent and Petaling Tiles 35 per cent. The breakdown of the Malaysian wall tiles market by type of product

22

INTERNATIONAL MARKETING

EXHIBIT 3.8 Malaysian Wall Tiles Market by Type of Tiles % of Market

Type of Tiles

75 10

Plain white Plain coloured Decorative

15*

100

Total

* Decorative tiles are imported mainly from Italy and Britain. EXHIBIT 3.9 The Malaysian Wall Tiles Market by Suppliers (In percentages) Petaling Plain white Plain coloured Decorative

60 20

Seri Chempaka

Imports

Total

30

10

65 35

15

100 100 100

65

is summarized in Exhibit 3.8 and by suppliers in Exhibit 3.9. For domestic consumption as well as for exports, it is estimated that the Malaysian ceramic tile industry will grow at a rate of 10 to 15 per cent annually in the first half of the 1980s. Besides, attempts to control the smuggling of tiles from Thailand into Malaysia coupled with the momentum gathered by the construction industry since 1976 7 are favourable indicators for wall tile manufacturers despite rising costs of production. At the same time, a clear trend towards larger decorative tiles of 216mm square is emerging.

From Other International Suppliers The fact that Seri Chempaka has to compete not only with HOB Tileworks of Singapore and Petaling Tiles Sdn. Bhd. of Malaysia is evident from Exhibit 3.6. Singapore has been importing tiles made

Exporting to Absorb Excess Capacity

23

by many manufacturers from more than a dozen countries. They include wall and floor tiles that are plain or otherwise, both glazed and unglazed. Competition from international suppliers especially from Europe and Japan is expected to intensify as more attention is being paid to the growing market of Southeast Asia as a whole. With easy access to Singapore, an important regional trading centre, encouraged by the absence of import restrictions for building materials and free flow of foreign exchange, the management of Ser:i Chempaka realizes that considerable effort has to be made to ensure that Singapore, the market that has helped to contribute to its earlier growth by mopping up excess capacity, will not be the cause for excess capacity itself in the future.

Notes 1. The term "ceramics" has been defined by the Ceramic Industry Club of ASEAN to mean products made from clay-based materials, that are first shaped and subsequently hardened by heat. 2. The tile industry is known to be "energy-intensive". 3. Brought about by a labour shortage in the industry. 4. Retail outlets cater mainly to owners of houses and bungalows who constitute 5 to 10 per cent of the market, and to residents of flats for renovation purposes. 5. Most of the tiles sold directly to end-users are for the renovation of flats. It is estimated that 80 per cent of middle-income flat-owners renovate and remodel their flats within a year of purchase. Owners of low-income flats usually renovate their flats only when breakage occurs. 6. It is known that previously, a few other manufacturers of ceramic tiles stopped production in Singapore due to their inability to remain competitive in view of the high cost of imported materials. 7. The Malaysian ceramic wall tile industry faced tremendous difficulties in the mid-seventies when profits were at their lowest. Events took a favourable turn after 197 6.

Questions 1. What are the major, uncontrollable, environmental factors that have caused the decline in Seri Chempaka's share of the Singapore market?

24

INTERNATIONAL MARKETING

2. To what extent do you think Rahman and his executives may improve the marketing mix variables in the light of those factors that are uncontrollable? Why? 3. What alternatives are open to Encik Rahman for handling the company's difficulties in Singapore and for improving the company's performance in international markets? 4. If you were Encik Rahman, what course of action for Seri Chempaka would you take? 5. What further information would you like to have to help in your decisionmaking? How would you try to obtain such information?

NOTES

CASE 4

Sleek Cane Sdn. Bhd. (Part /)

Strengthening International Marketing Activities Through Expansion In early 1982, Mr Allan Tan, the General Manager of Sleek Cane, felt that the company should seriously prepare itself for difficulties ahead in marketing overseas. Although the company has been performing reasonably well for the last five years, Mr Tan was afraid that Sleek Cane may not be spared the problems that were already hitting several Malaysian exporters of cane or rattan furniture. Problems include shortage of skilled production craftsmen, difficulties associated with obtaining quality cane, peelings, etc., and the relatively inferior image of Malaysian cane products abroad. After discussion with his immediate subordinates, Mr Tan decided that the company should find ways of strengthening the position of the company in the international market. He thought that steps should be taken to alleviate problems of production so as to maintain quality standards, and hence to create more positive attitudes at least towards the company's products. He also felt that Sleek Cane should consider possibilities of widening its market by exporting to the United States as a strategy for enhancing its competitive position.

Company Background Sleek Cane Bhd. was formed in 1975 as a joint-venture between West European and Malaysian businessmen, with an authorized capital of M$1 million 1 of which M$600,000 has been paid up. Located in the northern region of Peninsular Malaysia, its main objectives are to manufacture and export cane furniture, the company's only line of business. Concentrating on turning out lounge and dining-room cane furniture from locally sourced material, Sleek Cane employs a work 25

26

INTERNATIONAL MARKETING

force of 100 production workers and about a dozen office staff. At present, its factory utilizes up to 85 per cent of its installed capacity. Right from the beginning, the company exported about 90 per cent of its production output. In 1975, export sales were less than M$200,000. Two years later, the figure was more than tripled. By 1978, export sales exceeded M$1 million. The company has been exporting its furniture under a single brand name, Tropicane. Although the brand is priced two to three times higher than those manufactured by small, family-run cane makers, 2 it has a "place" amongst the better quality brands in terms of design, upholstery, finish, and workmanship. It ranks among the top 20 per cent of the 20 to 30 Malaysian cane manufacturers/exporters in terms of both quantity and quality. For its export market located primarily in northern Europe, Sleek Cane has been selling direct to importers in Norway and Denmark. Thus far, the company has not dealt with agents or exclusive distributors, nor employed resident salesmen overseas. To promote the Tropicane line, the company has participated in trade missions, trade fairs, utilized direct mail, and media advertising. Catalogues, photographs, and samples have also been used. Sleek Cane exports its furniture wrapped in paper or PVC, in containers. As furniture is bulky to transport, a 9-foot container may take only 12 chairs. Shipping to northern Europe takes 10 to 12 weeks on average. It is normal for the company to accept letters of credit. However, credit terms are usually not extended to importers.

Malaysian Cane Furniture Manufacturers and Exporters

Producers In 1980, Malaysia had more than 2,000 manufacturers turning out furniture and fixtures from all kinds of material. Out of this, less than a fifth worked with cane and rattan. As many as 80 to 85 per cent of the cane-makers were small proprietorships and partnerships, each employing no more than ten workers. In fact, fewer than 5 per cent had a payroll exceeding a hundred employees and fewer than 5 per cent achieved an annual output of M$0.5 million or more.

Strengthening International Marketing Activities Through Expansion

27

Exports

As expected, only the larger amongst the cane manufacturers export overseas. Altogether the number of exporters does not exceed thirty. It is not unusual to find that most of them export only a part of their total production. From Exhibit 4.1, it may be seen that cane furniture constitutes about a fifth of all furniture exported from Malaysia. The major buyers include Australia, Norway, Singapore, the United States, Canada, and Germany. See Exhibits 4.2a, 4.2b, and 4.2c.

EXHIBIT 4.1 Exports of Furniture from Malaysia, 1978-81 {In M$ thousands f.o.b.) Type 1 2 3 4 5 6 7 8

Furniture of Cement Office Furniture of Steel Office Furniture of Wood Other Furniture of Wood Other Furniture of Other Material Office Furniture of Other Material Other Furniture of Metal Parts for Other Furniture Total Value Percentage Share of Furniture of Other Material i.e., (5+6+8)

1978

1979

1980

1981

300

1243

90108

53487

204174

565633

358564

1448172

999117

803895

8060095

11658396

13525019

16235290

1159854

2027656

2960106

3740310

36943

112382

20772

61647

410789

417736

176434

2344519

1282127

870946

635317

1768806

11398480

16588775

18521239

25521343

21.7%

18.2%

19.5%

21.8%

Source: Department of Statistics, Malaysia. Note: Cane furniture exported from Malaysia is categorized in rows 5, 6, and 8. From observation, it is known that cane is seldom used for office furniture. "Other materials" would include plastic, bamboo, and synthetic materials.

28

INTERNATIONAL MARKETING

EXHIBIT 4.2a Exports of Other Furniture of Other Materials (SITC 82199190) from Malaysia, 1980-82 (In M$ thousands f.o.b.) Destination

1980

1981

1982

Australia Bahrain Brunei Burma Canada Denmark France Germany, Fed. Rep. of Hong Kong India Indonesia, Rep. of Ireland Japan Korea, Rep. of Lebanon Netherlands New Zealand New Caledonia Norway Oman Philippines Saudi Arabia Seychelles Singapore, Rep. of Switzerland Thailand United Arab Emirates United Kingdom USA Venezuela

571053

623058

718092 280 66680

Peninsular subtotal Sa bah Sarawak Total Malaysia

171842 273508 26746 121861

2448 510 329392 79123 92422

114 66

864

166158

124490

125854 22752 1287 2828 100 5101 480 16459 52

4820 16978 26108 309753

375 23655 29012 791013 1300 8166

8013 3325 184128 5545

341793

398398

400 1748 91757 283491

146 114 124185 212847

2541465

2840018

2159770

198004 220637

446846 453446

676720 808906

2960106

3740310

3645396

400 97918 538405 20

375 12720 451020

Strengthening International Marketing Activities Through Expansion

29

EXHIBIT 4.2b Exports of Office Furniture of Other Materials (SITC Code 8219911 0) from Malaysia, 1980-82 (In M$ thousands f.o.b.) Destination

1980

1981

1982

Australia Indonesia, Rep. of Singapore, Rep. of United Kingdom USA

95 13764 900 6013

61647

40638 2213

Total Malaysia

20772

61647

44218

1367

Problems Facing the Industry Despite the fact that tropical cane and rattan can be bent into various graceful shapes and despite its durability and fine texture-cum-lustre, consumers in developed, Western markets are slow in accepting furniture made from cane. There is a tendency to associate cane furniture with the lower-income groups. Moreover, furniture of Asian origin is thought to be overly exotic in design and/or inferior in craftsmanship. However, with a better understanding of international tastes and standards, Asian exporters are believed to be slowly invalidating some of the negative views in the market. Until recen~y, cane furniture had the added advantage of competing as a less expensive substitute for conventional wood furniture. Amongst Malaysian manufacturers and exporters, the rising cost of material and the increasing wages of labour (to about M$30 a day) have made it difficult for importers to remain price competitive. The former is pa~y attributed to the lucrative export market for raw rattan material, despite steps taken by the Malaysian Government to impose export duties on raw rattan, and the removal of duties on similar imports; the latter arises from sheer expansion of the industry without a corresponding increase in the number of skilled production workers. Moreover, the rising costs of handling-cum-freightage bear significantly on the final price of cane furniture sold in foreign markets. Although knock-down products may be a possible cost-saving, Malaysian manufacturers need

30

INTERNATIONAL MARKETING

EXHIBIT 4.2c Exports of Parts for Other furniture (SITC Code 92199900) from Malaysia, 1980-82 (In M$ thousands f.o.b.) Destination

1980

1981

1982

Australia Bahrain Brunei Burma Canada Denmark France Germany, Fed. Rep. of Hong Kong Indonesia, Rep. of Iraq Japan Netherlands New Caledonia New Zealand Norway Saudi Arabia Singapore, Rep. of Sweden Taiwan Thailand United Kingdom USA Yemen Arab Republic Yemen Peoples Democratic Republic

161601 12240

221452

298104

Total Malaysia

23850 1430

894 1550

134734 166 347 46429 120

25494

68267 280 119095 575 312

108924 758

8522 156943

310 122112

17009 5102

100763

120 152388 120

180 988 158807 2671

320 1185 971856

33151 582002

1768806

1473873

316667 1639 7062

3229 635317

to improve on their engineering skills in order to turn out furniture that may be assembled easily and fitted precisely. A notable exception is Noc Down Co., a sole proprietorship, that has been in existence since 1946. The company started exporting in 1968 under the brand name Simple Cane, primarily to Australia and New Zealand.

Strengthening International Marketing Activities Through Expansion

31

International Competitors Malaysia competes internationally with about half a dozen countries that export cane furniture. Products from Hong Kong and Taiwan are considered to have an oriental flavour whilst those from the Philippines are regarded as "tropical" in styling. It is also known that labour costs for manufacturers in Hong Kong are relatively lower than those in the Philippines and Malaysia. The industry in Taiwan employs more capitalintensive and advanced technology than other countries. It is felt that Malaysian exports of cane furniture face relatively stiff competition from Philippine and Thai exports, both in terms of product range (including design) and price. Products of the three ASEAN countries, namely, the Philippines, Thailand, and Malaysia, compete closely in the same segment.

The U.S. Cane (Rattan) Furniture Market

Size and Growth of the Market The size of the U.S. market for wicker, willow, and rattan furniture was estimated to be worth US$140 million in 1980. See Exhibit 4.3. Rattan or cane is the dominant material used in this category and one can safely assume that the prevailing market demand is for furniture made of rattan. Over the period 1976 to 1980, the value of the market for rattan furniture more than doubled although a substantial portion of the increase was attributed to inflation. f\ccording to statistics of the

EXHIBIT 4.3 Estimated Size of the U.S. Market for Wicker, Willow, and Rattan Furniture, 1976-80 (In US$ millions) Year

Domestic Production*+ Imports - Exports

37.4 42.4 47.7 54.6 62.2

1976 1977 1978 1979 1980

Note: US$1 = M$2.3.

*

=

Estimated.

+ + + + +

30.3 45.4 55.0 63.4 80.0

-

1.0* 1.0* 1.5 1.2 2.1

=

Apparent Market*

66.7 86.8 101.2 116.8 140.1

32

INTERNATIONAL MARKETING

EXHIBIT 4.4 Market Shares of U.S. Household Furniture Market by Type of Furniture, 1976-80 (In percentages) Type of Furniture Wood Upholstered Metal Bedding Wood Cabinet Furniture NES (SIC# 2519)

1976

1977

1978*

1979*

1980*

42 27 12 13 3 3

40 28 12 14 3 3

40 29 12 13 3 3

40 30

39 30

100%

100%

100%

11

11

13 3 3

14 3 3

100%

100%

Source: U.S. Department of Commerce, Industrial Outlook for 200 Industries (Washington, D.C., 1980). * = Estimated.

U.S. Commerce Department, wicker, willow, and rattan furniture constituted only 14 per cent of the category defined as furniture NES {SIC# 2519), i.e. Not Elsewhere Classified under Standard Industrial Classification number 2519. Thus the market for cane furniture is only 0.4 per cent (i.e., 14 per cent of 3 per cent) of the total U.S. furniture market. See Exhibit 4.4. It is widely acknowledged that the number of new housing starts each year is a good indicator of the potential for sales in the furniture industry. This number has been declining sharply in the late seventies and early eighties, possibly due to rising construction costs, high interest rates, and the increasing inability of potential buyers to afford homes that are ever increasing in price. However, other factors such as the growing number of young married couples entering the market, the population shift to the Sun Belt states, and the increasing number of retired people moving to Florida, Arizona, and Hawaii, point to a relatively strong housing market throughout the 1980s. Furthermore, many people are diverting their savings towards home additions and alterations - activities that will increase the demand for new furniture. The trend towards the addition of patios and sun-decks and the purchase of vacation homes in the warmer southern states, indicates that rattan furniture may become a popular alternative. In fact Exhibit

33

Strengthening International Marketing Activities Through Expansion EXHIBIT 4.5 Imports of Wicker, Willow, and Rattan Furniture into the United States, 1976-80 (In US$ millions c.i.f.) Origin

1976

1977

1978

1979

1980*

Philippines Hong Kong Taiwan Italy Spain Yugoslavia Thailand Mexico China Poland Haiti Others

5.6 13.4 1.3 1.3 2.2 2.2 0.2 1.5 0.7 l.O 0.2 0.6

11.1 17.0 2.5 1.9 3.3 3.7 0.2 2.0 1.2 0.8 0.3 0.9

19.0 17.0 3.8 3.0 3.2 2.7

0.8 0.5 2.1

24.6 20.2 4.3 3.1 2.9 1.6 1.4 1.3 l.O 0.6 0.6 1.8

37.0 21.9 6.4 2.8 1.2 2.0 1.5 1.5 2.5 0.6 0.8 1.8

30.3

45.4

55.0

63.4

80.0

$

1.8 l.l

Source: U.S. Department of Commerce, 1975-79 inclusive. * = Estimated, cumulative up until October 1980.

4.5 shows a rising trend for imports of wicker, willow, and rattan furniture in the late seventies.

Demand Characteristics Despite the observation that rattan furniture has been riding a wave of popularity over the last few years and has appeal amongst most age groups, it is believed that such items of furniture are often bought as accent pieces. They are purchased in sets more likely by young couples starting new homes or for second vacation homes. The expenditure pattern for household furniture is shown in Exhibit 4.6. Further, the U.S. furniture industry has segmented the furniture needs of final consumers according to the stages of consumers' life-cycle as presented in Appendix A. While quality is given first priority by the consumers, a survey by Krochler Manufacturing Company, a leading furniture manufacturer

EXHIBIT 4.6 U.S. Personal Consumption Expenditures on Household Furniture, 1972-78 (In US$ billions)

1972

1975

1976

Total Personal Consumption Expenditure (PCE) 970.0 1089.9 Current dollars 733.0 Constant 774.6 dollars (1972) 733.0 820.6 Household Furniture Current dollars Constant dollars (1972)

1977

1978

Percentage Change 1972-77

1210.0

1350.8

84.2%

861.7

900.8

22.9%

9.9

12.5

13.7

15.4

16.9

70.7%

9.9

10.3

10.9

11.8

12.3

24.2%

Per Cent of Total PCE Current dollars 1.35% Constant 1.35% dollars (1972)

1.23%

1.26%

1.27%

1.25%

-7.4%

1.33%

1.33%

1.37%

1.37%

+1.3%

Source: U.S. Department of Commerce, U.S. Industrial Outlook for 200 Industries, 1980.

Strengthening International Marketing Activities Through Expansion

35

in the United States, shows that final consumers in the American market no longer regard weight as one of the prime indications of the value of furniture. Newer generations tend to be more mobile and are more likely to buy a moderately priced piece every five years than a highpriced piece every fifteen years. Consumers have replaced their selection priorities of durability, comfort, and price by function, style, blend with other furniture, quality, comfort, durability, and price in that order. Furniture shoppers are placing more emphasis on aesthetic and sensory qualities such as colour, design, fabrics, and finishes. With regard to style and design of rattan furniture imported from overseas, there is a need to "Americanize" in order to blend with American decor. Furniture that is too exotic creates interest but not sales. The east and west coasts which are known to be more responsive to trends and contemporary life styles offer potential for imported rattan furniture. As expected, east coast furniture importers generally obtain supplies from Europe such as from Italy whilst west coast importers purchase from the Philippines, Hong Kong, Taiwan, and the East, to minimize transportation costs. The southern states, the climate of which has caused some population shift from other states, may also constitute a major market for imported rattan furniture of acceptable design.

U.S. Rattan Furniture Manufacturers In 1980, there were fourteen domestic manufacturers of rattan furniture each with annual sales exceeding US$1 00,000. 3 Three of the companies are large, each with assets of over a million dollars. Many of the domestic manufacturers also import partially-made furniture from foreign suppliers for the purpose of completing upholstery and finishing work in the United States. Imports currently exceed domestic production by about 30 per cent. Of concern to importers is the reliability of suppliers in meeting specifications and delivery dates, hence the importance of political stability in the supplying nations. Shipping rates and related costs, which are major cost items for imported furniture, also bear significantly on the final price, hence competitiveness of imports. On the other hand, it is interesting to note that the United

36

INTERNATIONAL MARKETING

EXHIBIT 4.7a Exports of Furniture from the United States by Category, 1973-77 (In US$ thousands) Year

Other Household Furniture Including Rattan

Wooden Furniture

1973 1974 1975 1976 1977

4,483 6,635 7,976 14,199 14,897

40,669 67,341 69,203 108,103 117,172

Source: U.S. Department of Commerce.

EXHIBIT 4.7b Exports of Furniture from the United States by Country of Destination, 1977 (In US$ thousands) Destination Canada United Kingdom Germany, Fed. Rep. Australia Mexico Saudi Arabia Bahamas Dominican Rep. Netherland Antilles Panama Other Total

Other Household Furniture Including Rattan

Wooden Furniture

7269 217 97 109 363 4103 69 103 251 214 2102

68000 2338 1009 878 6002 14388 3422 878 1320 899 17668

14897

117172

Source: U.S. Department of Commerce.

States does export a limited quantity of rattan furniture (as indicated in Exhibit 4.7a) mainly to Canada (as shown in Exhibit 4.7b).

Strengthening International Marketing Activities Through Expansion

37

kcess to the U.S. Market Rattan furniture was included in the U.S. Generalised System of Preferences on 31 March 1981. Imports from non-MFN-GSP countries are subjected to a tariff of 60 per cent ad valorem whilst imports from most-favoured nations which are not eligible for GSP are required to pay 16 per cent ad valorem. There is no other import tax, regulation, or quota that impedes the flow of the product. Being a beneficiary country of GSP, Malaysia may export cane furniture to the United States without payment of tariffs at the U.S. point of entry.

Distribution An exporter's immediate link in the United States is the importer. He may be an importer-manufacturer who buys rattan furniture in the "stripped down" form to paint, reinforce, or upholster before selling. The importer may be a retailer who imports for his own inventory needs. Or he may be one of the many agents who put foreign manufacturers in touch with domestic buyers, wholesalers, retailers, institutional buyers, and interior decorators in the United States. (See Appendix B.) In the United States, furniture wholesalers generally sell to registered dealers, interior decorators, architects, and other contract operators. However, they do not play a large role in the distribution of imported cane furniture due to the "high cost" of carrying rattan inventory. Sometimes showroom operators may exhibit merchandise introduced by the importer. Retailers of rattan imports may include furniture stores, department stores, and discount clearance and speciality stores. Department stores and speciality stores are major buyers of imported rattan furniture. The success of department stores in merchandising furniture has been attributed to their better customer service, greater availability of credit, easier merchandise return policy, and faster deliveries. Speciality stores operate by aiming their goods at carefully defined market targets. Such stores usually appeal to the early adaptors and the more innovative consumers. Generally, the costs of shipping rattan furniture provides an incentive for large retailers to bypass middlemen. However, the time lag between placing an order with a foreign manufacturer and receiving the goods in the United States averages between 10 to 12 weeks.

38

INTERNATIONAL MARKETING

Promotion Promotion plays an important role in the U.S. furniture market at the various levels of distribution. Manufacturers and importers participate in trade shows such as those at High Point, North Carolina in April and December, and in Chicago, Dallas, Atlanta, Los Angeles, and San Francisco in January and July. Distributors of all levels as well as end-buyers visit such shows to familiarize themselves with trends in the industry. In addition, importers advertise in trade journals and magazines. Retailers promote furniture on the basis of quality, price, and life-style with the help of store displays, local newspapers, catalogues to households, and credit facilities. It is known that selling practices at the final level have been dominated by retailers because they source from many manufacturers. Retailers are known to have resisted branding by suppliers and have kept influence of brands at a minimum. In fact retailers sometimes remove manufacturers' brands and substitute them with their own trademarks.

Pricing and Payment As expected, the final retail price includes costs of manufacturing, shipping, insurance, mark-ups, and commissions paid to agents. On average, commissions and insurance each account for about 10 per cent of the total value of the goods whilst importers and retailers each add a mark-up of about 100 per cent to their purchase price. Although the use of containers for shipping has to a large extent reduced the risk of receiving damaged goods, the cost of containerization has to be taken into account. As an example, Exhibit 4.8 shows the cost per container load from Manila to Los Angeles and to Baltimore. Cost per cubic metre, without container, is also shown. From the importers' point of view, loans from banks to cover inventory purchases are too costly for furniture that may take three months to sell. On the other hand, credit from exporters is difficult to come by. It is therefore not uncommon to find importers paying 50 per cent of the value of an order at the time the order is made and the balance when the merchandise is received with a bill of lading. As such, the length of delivery time is crucial to the financial terms between the importer and the exporter.

Strengthening International Marketing Activities Through Expansion

39

EXHIBIT 4.8 An Example of Shipping Costs from Manila to Los Angeles and Baltimore, 1980 Container Size*

8' 6"

9' 9' 6" Without Container

Cost in US$ per container load to: Los Angeles Baltimore 2150 2350 2450

2550 2750 2850

Cost in US$ per cubic metre of cargo to: Los Angeles Baltimore

Shipping Cost Bunker Charge

37.00 19.00

42.50 19.00

Cost per cubic metre

56.00

61.50

Source: President Shipping Line. * Each container takes up to 12 standard single-seat cane chairs on average.

International Suppliers to the U.S. Market The Philippines, Hong Kong, Taiwan, and Italy are the largest suppliers of cane furniture to the U.S. market. As Malaysia competes closely with the Philippines and Thailand, Mr Tan of Sleek Cane gathered some information on the industry in the two countries.

Filipino Rattan/Cane Furniture Industry There are as many as 120 manufacturers of rattan products in the Philippines making some form of furniture or other, with annual sales revenue ranging from US$2,000 to US$5 million. More than threequarters are small, sole proprietorships whilst the rest include partnerships and corporations. In terms of employment, 60 per cent of the manufacturers engage fewer than a hundred workers, 30 per cent have between one to five hundred on their payroll, and only 10 per cent employ above five hundred persons. The industry is considered labour-intensive.

40

INTERNATIONAl MARKETING

Most Philippine manufacturers have their own interior decorators and designers. However, foreign buyers usually provide their own product designs according to their requirements of size, colour, and finish. Quality control is strict right from the designing of the product, through selection and processing of raw materials, to the packaging used. Most manufacturers stress quality assurance to attract buyers. Cane furniture from the Philippines is usually packed in semi-knockdown form, and wrapped in corrugated boards and synthetic foam, before being shipped in containers. However, high transportation cost is still a problem Filipino manufacturers have to reckon with, besides the progressive decline in supply of raw materials and low productivity of labour. Transactions are settled mainly by letters of credit. large manufacturers participate in international furniture trade fairs in Cologne, Federal Republic of Germany; Milan, Italy; and in High Point, North Carolina, USA. They are also actively involved in trade missions overseas although heavy dependence is placed on personal contacts in finding export outlets. Manufacturers usually obtain specifications from buying agents and have their designs approved before commencing actual production for export. To encourage export trade, the Bureau of Foreign Trade (BFT) established by the government, organizes selling missions and trips to international fairs. On the other hand, the Export Marketing Assistance Division (EMAD) of BFT renders assistance to foreign buyers or importers who visit the country for the purpose of contacting reputable suppliers. In addition, information is disseminated to manufacturers/ exporters in the form of "opportunity reports". It is observed that rattan furniture exports from the Philippines have been increasing over the last few years, as summarized in Exhibit 4.9. The United States constitutes their most important market whilst many of the EEC countries are also importers. Exports of rattan furniture are expected to grow from US$141.7 million in 1984 to US$206.4 million in 1985.

Thai Cane Furniture Industry Thailand's furniture industry is one of the country's fledgling, nevertheless traditional industries, as far as international marketing is concerned. Target markets include the United States, EEC countries, the Middle

EXHIBIT 4.9 Exports of Rattan Articles* from the Philippines by Country of Destination, (In US$ thousands)

1981

(%)

1980

1979

United States Australia Japan Canada Sweden F R Germany Netherlands Hawaii France Puerto Rico Italy Belgium United Kingdom Oman Denmark Hong Kong Mexico Singapore Saudi Arabia Guam Others

25030 4688 2414 2060 1825 1721 1411 1139 892 749 528 450 388 340 324 296 294 169 163 152 889

54.51 10.08 5.89 4.49 3.97 3.75 3.07 2.48 1.94 1.63 1.15 0.98 0.84 0.74 0.71 0.64 0.64 0.37 0.35 0.33 1.94

18940 3070 4889 1162 2019 3270 1968 714 740 715 683 634 444 261 440 287 2 42 29 227 1437

13268 3092 3561 1169 903 3034 1493 860 354 116 309 531 355 243 183 213 41

Total

45922

100.00

41979

Rank

Destination

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

Source: National Census & Statistics Office, Philippines.

* Mainly

rattan furniture.

1978 7388 2242 551 470 389 1007 413 459 173 51 187 470 95 63 59 38

1977

-

-

40 145 422

116 47 545

5892 1425 569 23 19 931 120 293 58 26 349 614 31 25 48 54 3 3 1 45 571

30332

14763

11426

-

42

INTERNATIONAL MARKETING

East, Japan, Federal Republic of Germany, and Australia. Sales to the United States, one of its larger importers, have yet to reach the US$200,000 mark although exports to Canada have exceeded that figure. There are more than 200 manufacturers of cane furniture in Thailand, the majority of which are cottage-sized enterprises. It is not surprising that only 5 of the manufacturers employ more than 100 workers, 15 employ between 50 to 100, whilst the rest employ fewer than 50. The cost of labour is about 60 baht per day (1 baht = M$0.1 0). Several of the larger firms, however, are capable of producing more than half a million U.S. dollars worth of furniture per annum. As in the case of the Philippines, the Thai Government has played an active part in encouraging manufacturers to join trade missions and trade fairs in the importing countries and in countries with opportunities for trade. Thai cane furniture is also displayed at Thai trade centres in many countries where Thai officials provide assistance to foreign importers who wish to contact Thai manufacturers. However, the cane furniture industry of Thailand has to overcome several major set-backs if it is to progress rapidly. To compete internationally, the Thai cane furniture industry must contend with such problems as high transportation costs, lack of modern production technology, absence of product design expertise, and inadequate information on overseas markets.

APPENDIX A Life-Cycle Stages Among End Customers in the United States

Stages of Life

Characteristics

Needs

Career Efficiency

Often an independent single. New entry to market with few financial worries. Considered innovative opinion leaders.

Furniture that is economical, versatile, carefree, and contemporary. Buys for temporary use.

Newly-Married Couples

Many new-home buyers who are in the market for durables.

Seek practical, multipurpose furniture that can blend easily with

Strengthening International Marketing Activities Through Expansion Stages of Life

43

Characteristics

Needs

Considered in good financial position. large percentage of wives work full-time.

future purchases. Generally buy pieces.

First-Home Buyers

Experienced in the market. Have assumed large financial responsibility, but have furniture needs that are not postponable.

Greater need for furniture additions. Buy in sets instead of pieces. Home is a showcase, therefore style is important.

First-Time Parents

Family-oriented. Home purchases at peak, but also trying to save money and adapt to new lifestyle. Period marked by shifting expenditures.

Need for infant furniture nonpostponable. Buy more furniture for storage purposes.

Aging Family Unit

Older couples with dependent children or teenagers. More financially secure, and show a renewed interest in durables in order to update present holdings.

Need for recreational furniture to support youthful activities. Need to replace old furniture pieces. Additions to home create need for new sets of furniture.

Empty Nesters and Second Homes

Stage I: Older couples with independent children. Financially secure. Able to purchase alwayswanted items. Often travel.

In the market for highend accent pieces. Furniture often bought for vacation homes.

Stage II: Aged couples or solitary survivors. Often retired with diminished incomes. Shift to medical expenses. Many sell home for smaller units.

Diminished need for any new furniture. Furniture's utility most important.

.M.rrE.I ... UIA. U

Principal Channels of Distribution for Rattan Furniture In the United States

Foreign Furniture Manufacturer Exporter

Warehouse Showroom Outlets

Retailers, Furniture, Department and Speciality Stores

Interior Decorators

Final Customer (Institutional Clubs, Hotels, Restaurants, etc.)

Final Customer (Household Purchaser)

Strengthening International Marketing Activities Through Expansion

45

Notes 1. US$1 = M$2.35. 2. It is known that small-family producers may price a cane lounge set for as low as M$400 to M$600 at the lower end of the domestic market. 3. Out of more than 3,500 manufacturers of furniture of all descriptions.

Questions 1. Do you think the fears of Mr Allan Tan are justified? 2. Do you agree to his approach of widening his market as a strategy for strengthening his company? 3. From your analysis, is Sleek Cane ready to enter the U.S. market? 4. Assuming that the company takes the decision to include the United States as one of its international target markets, outline a possible draft plan for Mr Tan's consideration, given the present information. 5. What additional information would you advise the company to seek before making its final decision? 6. What problems would you caution the company to expect when marketing to the United States?

NOTES

CASE 5

Sleek Cane Sdn. Bhd. (Part II)

Segmenting the Target Market in Canada Kong Loy Fatt has been with Sleek Cane since the company began operating in 1975. From his initial position as a general office clerk, he rose rapidly through the ranks as the company grew, to become the sales supervisor in charge of export sales and orders. In mid-1982, Kong and his family decided to migrate to Vancouver, Canada for two main reasons. First, Kong wanted to be with the rest of his brothers who settled there earlier and secondly, he believed that their move would provide better educational opportunities for his three children. Kong plans to start his own business in Vancouver initially as an importing agent for Sleek Cane selling the Tropicane furniture line to retailers, wholesalers, or even manufacturers who wish to carry the products. Eventually, with more capital and knowledge of market conditions in his area, he hopes to rent a store front to sell imported cane furniture directly to final buyers. About a year ago, Kong told Encik Kamaruddin, the head of marketing in Sleek Cane, of his plans. Although Encik Kamaruddin was sorry to lose a good member of his staff, he was encouraged by Kong's eagerness to introduce the company's products to Canada albeit on a small scale. He advised Kong to prepare himself for his new venture and to carry out some market investigation on his own if possible, before his departure. He further expressed willingness to provide Kong with advice on marketing and sales of the Tropicane line manufactured by Sleek Cane. Without any formal training in management and business, Kong spent three days of his annual vacation leave attending an intensive course on marketing at the Malaysian Institute of Management. On learning the importance of the market segmentation strategy, he thought he might do better by concentrating his selling efforts

47

48

INTERNATIONAL MARKETING

on a particular market or product segment, especially since he had to do everything on his own with limited resources. Taking Encik Kamaruddin's advice, he decided to gather some information on the Canadian cane furniture market, possibly to help him select a likely segment to work on. However, after serious analysis of the information and statistics he collected, he was not able to isolate decisively a potential target market. He figured he could make his final decision after his arrival in Vancouver. Besides, the segmentation strategy would be more important at a later date when he was ready to set up a retail store. Nevertheless in his mind Kong narrowed his segments tentatively to the apartment-dwelling and economy sectors. Kong summarized his findings under several major headings as shown below, and presented them together with some statistics to Encik Kamaruddin for his views.

Information on the Canadian Cane Furniture Market

{as Listed by Kong) I

Size of Market

1.1 1.2 1.3

II

The cane furniture market was about 1.5 per cent of the total furniture market of Canada in 1981. The cane furniture market was valued at approximately C$15 million in 1981. (C$1 = M$1.9) 60 per cent of the cane furniture is imported.

Growth of Market

2.1 2.2

2.3

The cane furniture share of the total furniture market was estimated to increase to 2 per cent by 1983 and 1984. In value, the cane furniture market was estimated to be worth C$26 million and C$34 million in 1983 and 1984 respectively. For 1983 and 1984, it was estimated that the import share would increase to 70 per cent valued at C$18.2 million and C$23.8 million respectively.

Segmenting the Target Market in Canada

49

Ill Recent Trends 3.1 3.2

Imports of cane furniture (including willow} into Canada increased from C$3.3 million in 1978 to C$8.2 million in 1981 as shown in Exhibit 5.1. The growth of the household furniture market is generally positively correlated with the number of housing starts. Despite the decline in housing starts between 1977 and 1981 (see Exhibit 5.2) the rise in imports of cane and willow

EXHIBIT 5.1 Value of Imports of Household Furniture, (Rattan and Willow) into Canada, 1978-81

Year

Value C$'000

Annual Change in %

1978 1979 1980 1981

3,271 4,877 5,457 8,194

+49.1 +11.9 +50.2

Source: Statistics Canada - Imports by Commodities Cat. 65.207 Annual 1978, 1979, 1980, 1981. EXHIBIT 5.2 Housing Starts in Canada, 1974-84

Year

No. of Units

1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984

223,123 231,456 273,203 245,724 227,667 197,049 158,601 177,973 127,000* 173,000* 220,000*

* Projected figures by the Conference Board of Canada. Source: Canadian Statistical Review, a monthly.

50

INTERNATIONAL MARKETING

furniture during the same period indicates that Canadian consumers are showing an increased acceptance for such furniture. This may be due to the price advantage of cane over traditional wooden furniture. The size of the apparent market for household furniture in Canada, is indicated in Exhibit 5.3. EXHIBIT 5.3 Apparent Domestic Market for Household Furniture ofCanada, 1978-80 Value in C$'000 -------------·---

Shipments + Imports - Exports

Year 1978 1979 1980

887.6 1083.3 1164.2

+ 179.8 + 189.5 + 191.4 -

=

Apparent Domestic Market

21.7 34.3 44.1

1,045.7 1,238.5 1,311.5

Percentage Change

+ 15.6% +5.9%

Source: Statistics Canada.

3.3

3.4

The number of housing starts is expected to increase over the next few years possibly due to lower rates of interest as well as government assistance in the form of grants to firsttime buyers. Canada does not impose restrictions on the import of cane furniture. However, a tariff of 11 .5 per cent ad valorem is payable for such goods from developing countries and a tariff of 15 per cent is payable for goods from the Commonwealth. In other words, in the event that the former is not applicable, Malaysian exports are still eligible for the latter.

IV Type of Cane Furniture in Demand

4.1

Generally cane furniture purchased by Canadians falls under two main categories: a) cheap, somewhat crudely finished furniture imported from the Philippines and China, and b) more expensive, well-styled furniture normally imported from Hong Kong.

Segmenting the Target Market in Canada

4.2

4.3 4.4 4.5

4.6

51

Smaller pieces such as 3-seater sofas and love-seats are popular. This is due to the fact that houses and apartments are getting smaller, hence the preference for space-saving furniture. Large "peacock chairs" and "papasan chairs" are only fad items worth a very insignificant market share. Goods with long-term potential include room dividers, stacking tables, and dining-room sets. Canadians want quality cane furniture in styles that suit their taste yet at reasonable prices, for cane furniture is regarded as an inexpensive alternative to wooden furniture. It is not uncommon for importers to purchase only the frames overseas and add cushions-cum-upholstery in Canada.

V Trade Practices 5.1

5.2 5.3 5.4 5.5 5.6

5.7

Generally retail prices in Canada are about four times the export f.o.b. prices. Prices vary with the country of origin of the goods as well as with distributors' mark-up. For example, the price of a chair from China is lower than a similar product from Hong Kong as follows: Origin: China Hong Kong Export f.o.b. price: C$30 C$75 Wholesale price: C$40 C$150 Retail: C$120 C$300 Shipping costs of imported furniture constitute an important component of their final selling price. Retailers' mark-up varies between 100 per cent and 200 per cent on their cost price. Canadian importers generally sell to retailers such as department stores and speciality stores. Institutional buyers may import directly or buy through importers. Although c.i.f. price quotations are sometimes requested, Canadian importers generally utilize quotations on an f.o.b. basis, preferably in Canadian or U.S. dollars. Though letters of credit are considered expensive, they make up the main method of payment.

INTERNATIONAL MARKETING

52

EXHIBIT 5.4 Imports of Furniture, Rattan*, Willow into Canada by Country of Origin, 1978-81 Value C$'000 Origin

1981

1980

2 1 4

5

United Kingdom Belgium, Luxemburg Denmark Finland France West Germany Italy Netherlands Norway Portugal Spain Sweden Hungary Poland Yugoslavia Sri Lanka Hong Kong India Malaysia Singapore People's Rep. of China Indonesia Japan Philippines Taiwan Thailand Peru Haiti USA

3,807 8 156 13 108 20 1 2,489 474 209 8 15 488

Total

8,194

1 2 111

14 208

1979

1978

416

288

181

86

6 4 7 262 4 5 14 134

2 9 8 38

17 30 63 17 2,850 66 67 8 218 17

44

48

2,329 10

1,673 13

116

41

947 166 76

1,217 104 44

629 78 19

25 449

331

325

5,457

4,877

3,271

* Rattan (cane) is normally from the tropical and sub-tropical regions while willow is normally from the European countries.

Segmenting the Target Market in Canada

53

VI Other Information

6.1

6.2

6.3

The major suppliers of cane furniture to Canada are Hong Kong (nearly 50 per cent), Philippines (about 30 per cent), the United States, Italy, People's Republic of China, and Taiwan. See Exhibit 5.4. Although Hong Kong is regarded as the traditional supplier of cane furniture and other cane products, a substantial proportion of the supplies is believed to have originated from China via Hong Kong. The Philippines has gained a major foothold in the Canadian market because of its low prices attributable to comparatively low wages. Taiwan is becoming increasingly important as a supplier because of its modern production techniques.

Questions l. Do you agree with Kong's attempt at market planning? 2. Evaluate Kong's understanding of market segmentation. 3. Identify some obvious gaps in information that is either not available or was overlooked by Kong and that would be useful. 4. From what is known, suggest some possible basis for segmenting the Canadian cane furniture market. 5. If you were Encik Kamaruddin, what advice would you offer Kong?

NOTES

CASE 6

Sleek Cane Sdn. Bhd. (Pari Ill)

Hedging Against International Financial Risks During a conversation at a cocktail party hosted by his bank, Mr Allan Tan, General Manager of Sleek Cane, learnt that Min Seng, a relatively small cane manufacturer had virtually stopped exporting to France and is concentrating on the Australian market. He also heard that Mr C.K. Lee, the partner-manager of Min Seng, finds it easier to travel to Australia than to France in order to gauge new trends and to meet importers. More importantly, Mr Lee believes that despite the growth of the cane furniture market in France, the rate of growth will be slowed down by the increasing price of imports due to the rising rate of the U.S. dollar to the French franc (or conversely the weakening French franc).

Min Seng Canes Min Seng is basically a family owned and family managed producer of cane (rattan) furniture. With twelve production workers, Min Seng has been doing better than its competitors of comparable size. Between 80 to 90 per cent of its products valued at M$60,000 to M$70,000 have been exported annually to France and Australia. The rest is sold in the domestic market. None of Min Seng's cane products carry a brand name. However, overseas distributors and retailers usually afix their own brand or company mark. Mr Lee makes occasional visits overseas to keep abreast with the latest trends and changes in style, to familiarize himself with his existing importers, and to make new contacts with potential importers. Almost all exports of Min Seng's cane products have been settled by letters of credit, with little or no credit extension. 55

56

INTERNATIONAL MARKETING

The French Market The French market for cane furniture was estimated to value more than 200 million francs in 1981, more than half of which was imported. See Exhibit 6.1 for figures in current value for 1980 and 1981. In real terms, the market has been growing steadily at about 10 per cent per year in the early 1980s. Although France produces some cane furniture with imported cane, domestic production in real value has been decreasing because the industry has been struggling against rising costs of labour and raw materials. Furniture designed in the old "louis YN" style is very popular in France. In fact more than 50 per cent of the furniture market is dominated by reproductions of old styles. However, there exists a notable trend towards furniture of modern designs, that are generally lighter and cheaper than traditionals. Approximately 40 per cent of the market is made up of modern lines. Furniture considered as "foreign" including canes constitutes about 8.4 per cent of the market. The evolving change in taste away from old styles may be explained by the growing recognition of quality in furniture that is not necessarily heavy in weight. Consumers who appreciate less heavy and less expensive furniture feel that such furniture can be replaced easily every few years or new pieces may be bought to blend in with what they already have. With the trend to using "natural" materials and the relatively lower price of cane products, the demand for cane furniture has been enjoying a stable rate of growth. EXHIBIT 6.1 Consumption of Cane Furniture in France, 1980-81 (In million francs*) Source of supply Domestic production Imports Total

1980

1981

%increase

86 87

94 118

9.3 35.6

173

212

22.5

* Note that given figures are in monetary terms. As the rate of inflation in 1981 was 14 per cent, the value of domestic production actually decreased in real terms.

Hedging Against International Financial Risks

57

Generally, living-room and dining-room furniture make up 50 per cent of all furniture bought by the French. Bedroom furniture takes up 16 per cent whilst children's furniture accounts for 7 per cent of consumption. An importer of cane furniture usually sells to a wholesaler although an agent may also be appointed. At the retail level about 75 per cent of cane furniture is sold through specialized shops and boutiques with interior decorators. Department stores and large showrooms handle about 10 per cent of the trade whilst 6 per cent are retailed through four important mail order houses. An importer purchasing cane furniture from Asia usually settles his transactions with letters of credit. Besides providing finance for the shipping period which averages two months, he expects to hold stocks for another four months after receiving them. In addition, he may finance his customers for about two months. It is therefore not surprising that an importer's financial cost amounts to 12 per cent of his price or 18 per cent or more on his f.o.b. cost. Every level of the distribution channel adds between 10 to 50 per cent to their cost of furniture. On average, another 10 per cent is added for transportation within France, although transportation from the north to the south of the country may be as much as 20 per cent of the trade price. Retailers normally enjoy credit of two to three months from wholesalers or importers. In turn, some of them grant credit to final buyers. Approximately 30 per cent of French furniture buyers purchase on credit.

Opportunity in France Mr Tan thought that the negative outlook of Mr C.K. lee towards the French market may be attributed partly to the inability of Min Seng to bear export, especially financial, risks. Another possibility is that during Mr lee's absence, business operations at Min Seng slow down because major decisions await his return. Sleek Cane would not be restrained by such problems simply because of its size, experience, and better organization. Mr Tan was tempted to give the French market a try. He felt that the market for cane furniture "was there" despite the increased price of imports due to the falling value of the franc. {In early 1981, the

58

INTERNATIONAL MARKETING

EXHIBIT 6.2 Imports of Cane Furniture in France, 1980-81 (In million francs) Supplier Country

1980

1981

% increase

Italy Thailand Philippines Spain Others

26.0 19.5 13.0 5.5 23.0

30.5 39.0 16.0 8.8 23.7

17 100 23 60 3

Total

87.0

118.0

36

Source: Malaysian Trade Office, France.

U.S. dollar to French franc increased by 55 per cent.) Mr Tan felt that opportunities for rattan furniture in the near future should be better than ever before because of the weakening franc. Bearing in mind that furniture made of rattan is less expensive than that of other materials, the market appears promising as consumers turn to cane furniture rather than the more expensive conventional lines. In fact, it is known that expansion of the cane furniture market in France is attributed mainly to an increase in imports rather than in domestic production. Moreover, according to projection on household expenditure, it has been estimated that for 1985, approximately 16.1 per cent of the average family budget in France will be spent on housing and another 9.8 per cent will be spent on home equipment of which furniture constitutes the largest item. However, Mr Tan realized that although imports from developing countries benefit from a preferential tariff scheme, cane furniture enjoys free duty only within certain quota limits, beyond which duties of 6 to 8 per cent c.i.f. value are payable. Although quotas are reestablished annually, it is known that the value has not increased significantly over recent years. From the Malaysian Trade Office in Paris, Mr Tan obtained some general information on the market. He noted that Italy was the most important supplier of cane furniture to France in 1980, followed by Thailand and the Philippines. In 1981, however, Thailand doubled its

Hedging Against International Financial Risks

59

exports, thus overtaking Italy as the largest supplier. Imports from Malaysia are relatively insignificant and are grouped under "others" in Exhibit 6.2.

Questions 1. Critically analyse the effects of the declining value of the French franc 2. 3. 4. 5.

(vis-a-vis the U.S. dollar and the Malaysian dollar) from the viewpoint of a Malaysian exporter. Do you agree with Mr lee or with Mr Tan? Explain the avenues open to Mr Tan for hedging against the risk of further devaluation of the franc. How would the rate of interest be expected to change in France and in what ways would the changes affect credit to importers and final buyers and hence export sales to France? If you were Mr Tan, would you attempt to market to France? Assumming that you do, suggest a financial policy for the company with regard to the French market, bearing in mind the marketing objectives.

NOTES

CASE 7

Sedap (Malaysia) Sdn. Bhd. (Part I)

Improving the Product of an Overseas Subsidiary In early 1979, Encik Othman Halim, the marketing manager of Sedap (Malaysia) Sdn. Bhd., received a directive from the parent company in the United States. Following a detailed review of the group's Asian subsidiaries the year before, it was the view of the international, division that the Malaysian operation was ready to add new products to its existing lines. Growth in per capita income, increasing rate of urbanization, and rapidly changing life-style and tastes were among the more important factors cited by the analysts at the group's head office. Encik Othman was asked to submit proposals after "careful consideration". From past practice, it was clear in Encik Othman's mind that mere idea-tossing would not be sufficient. Some analysis on the local market was expected by the parent company with regard to the recommended product or products. As usual, the task of scouting around for possibilities was shared within his department. By late 1979, Encik Othman had before him various suggestions raised by his own subordinates. After several meetings going through the preliminaries pertaining to the suitability, saleability, acceptability, viability, etc. of the proposals, Encik Othman and his staff appeared attracted to the suggestion of introducing a brand of cake mix to the Malaysian market.

Company Background Incorporated in Malaysia in 1967, Sedap is a wholly-owned subsidiary of an American multinational with affiliates in six other Asian countries and several western European ones. With a paid-up capital of nearly M$1.5 million and a work-force of about 150, the company operates as packer, blender, re-packer, and distributor of a wide range of 61

62

INTERNATIONAL MARKETING

processed food items. The more important products include corn oil, flour, peanut butter, jams, jelly crystals, custard, soups, stock cubes, glucose, and various sauces. On average, 35 per cent of the materials utilized by the company are obtained from Malaysian sources. Sold under different brand names, most of the company's offerings fall within the premium segment of their respective markets. They are well advertised and promoted in the appropriate media, such as women's magazines and other printed media on a national basis. Many of their brands were already well known as symbols of quality even before Sedap was formed, that is, when the products were imported and marketed by a leading agency house in Kuala Lumpur. Over the last two to three years, the company has relied rather heavily on free gifts for moving its products. Today, Sedap sells directly to retailers and wholesalers and to large order buyers such as caterers, hospitals, and government organizations. Its sales force and van-salesmen, numbering about eighteen, centre their operations around Sedap's warehouse which is located near the capital.

The Cake-Mix Proiect After lengthy deliberation, Encik Othman decided that Sedap should examine the cake-mix market in detail to determine especially:

l. product awareness amongst Malaysian consumers, 2. 3. 4. 5.

product acceptance and buying motives, buyers' socio-economic profile, buying habits and preferences, existing market offerings by competitors.

It was also decided that the University of Malaya be approached for help in conducting a survey of shoppers at major supermarkets, emporiums, mini-markets, and grocery stores in the Kuala Lumpur-Petaling Jaya area. A random sample of 200 shoppers were to be interviewed face-to-face, according to a questionnaire comprising multiple-choice and open-ended questions, subject to the approval of Sedap's marketing department.

Improving the Product of an Overseas Subsidiary

63

Findings from the Survey The nature and compostion of the interviewees in terms of their major socio-economic characteristics are summarized in Exhibit 7.1. Based on statistics compiled from the completed questionnaires, the main findings are presented below.

Product Awareness Generally, the degree of awareness of the existence of cake mix is fairly high, with 65 per cent {130 of 200) of the sample indicating that they have heard of the product. However, it is found that there exists a low degree of comprehension of what cake mixes are and the benefits obtainable therefrom. This is because most of the interviewees are able to identify the product only after interviewers described the product and its use. Even amongst respondents who have heard of cake mixes, many are of the impression that they are similar to self-raising flour. Of the 130 persons who are aware of cake mixes, only 57, i.e. 43 per cent, understand what it is al'ld are convinced enough to have used the product either previously or at the time of the survey. In terms of the entire sample, the finding that only 28 per cent of those interviewed have ever used cake mixes shows that room for improvement exists, not only by creating awareness of the generic product but more importantly by building an understanding and instilling conviction of the advantages derivable, hence final acceptance. It is found that across racial groups, "Others" show the highest degree of awareness, followed by the Chinese, and thirdly by the Malays. But in terms of actual usage, "Others" show the highest rate, followed secondly by the Malays, and only thirdly by the Chinese. The exact proportions are summarized in Exhibit 7.2. Amongst the 130 persons who have heard of cake pre-mixes, the manner or channels through which they are first exposed to the product were further examined. It is interesting to observe that the biggest proportion {36. 9 per cent) discovered the product on display shelves themselves. The second important group {28.5 per cent) heard of the product from members of their families or friends. Of those who attributed their awareness to mass media {magazines, T.V., etc.),

EXHIBIT 7.1 Major Characteristics of the Sample (In percentages) Categories

Characteristic

1)

Sample

Working 72.0

Work status

Non-working 28.0

100.0

Above $1,000 Undisclosed 34.5 19.0

100.0

·~--~--

2) 3)

4) 5)

Monthly income

Age

Under $500 24.5

Under 25 years 28.0

Malays 29.5

Over 35 years 19.0

25-35 years 53.0

Male 23.5

Sex

Race

$500-$1,000 22.0

Female 76.5

100.0 100.0

Chinese 44.0

Indians 19.5

Others

Single, i.e., 1 person

Married with no children, i.e., 2 persons

Married with 1 or 2 children, i.e., 3 to 4 persons

Married with more than 2 children, i.e., 5 persons &

46.0

13.0

31.5

9.5

7.0

100.0

~----

6)

Family size and status

more

100.0

Improving the Product of on Overseas Subsidiary

65

EXHIBIT 7.2 Product Awareness and Usage by Race (In percentages) Race Malays Chinese Indians Others

Of race not heard of

Of race heard of

Of race ever used

44.1 21.6 61.5 7.1

55.9 78.4 38.5 92.9

33.9 25.0 12.8 71.4

most of them had been overseas where more advertising had been employed for the product. About 11.5 per cent learnt of cake mixes from in-store demonstrations and special displays of the local brand. The lack of sales promotion either through the mass media or personal presentation is an obvious point worthy of further consideration.

Product Acceptance and Buying Motives It may be useful to break down each of the categories of respondents into users {or buyers) and non-users (or non-buyers). The statistical breakdown is provided in Exhibit 7 .3. All respondents were asked to give reasons for using or not using the product. Amongst the users, it is not surprising to find that convenience and/or speed are the most important reasons for using cake mix. This is related to the further finding that cake pre-mixes are used mainly in "emergencies" such as when unexpected visitors drop in, and where the speed factor counts. It is also found that the product is hardly used for "special occasions" such as birthdays, festivals, and anniversaries despite the fact that cakes are inevitably served at such times. The reason widely given for this is that consumers who bake are willing to put in more effort for a better-tasting cake. In fact, they feel they are obliged to spend more time and take more trouble. Some take the attitude that cake pre-mixes are meant for "lazy homemakers". The second important reason for using cake mix is the taste factor. It is evident amongst users that cakes from pre-mixes are generally found to be comparable to ordinary home-made or ready baked cakes. Moreover, many indicate that the wide range of flavours offered

66

INTERNATIONAL MARKETING

EXHIBIT 7.3 Product Acceptance by Socio-Economic Characteristics (In percentages) Characteristics

1) 2)

Work Status Working Non-Working Monthly income

$500 $5,000-1,000 $1,000 3)

4) 5)

6)

Undisclosed Age Under 25 years 25-35 years Over 35 years Sex Male Female Race Malays Chinese Indians Others Family size & Status Single Married + no children Married + 1 or 2 children Married + 2 children

Buyers

Non-Buyers

Total

26.4 33.9

73.6 66.1

100.0 100.0

12.2 16.7

87.8 83.3

100.0 100.0

21.4 25.9 44.7

78.6 74.1 55.3

100.0 100.0 100.0

17.0 32.0

83.0 68.0

100.0 100.0

33.9 25.0 12.8 71.4

66.1 75.0 87.2 28.6

100.0 100.0 100.0 100.0

20.7 42.3 31.8 36.8

79.3 57.7 68.2 63.2

100.0 100.0 100.0 100.0

by pre-mixes gives them an opportunity to taste cakes that were otherwise not readily available locally. A host of other reasons is given for using cake mixes, the more important of which are sales demonstrators' pressure, need to consume cake, and the tradition of using cake mix by parents or other members of the family. The price factor is found to be insignificant either in encouraging or discouraging the use of cake mix. This may be attributed to the

Improving the Product of an Overseas Subsidiary

67

finding that most of the users come from the higher income group and are expected to be relatively less price sensitive than others, whilst most of the non-users give reasons other than cost as factors that deter them from purchasing and using the product. Amongst the non-users, the majority do not buy or use cake mixes for various reasons that are quite apart from the intrinsic characteristics of the product itself. They include the dislike for cakes and baking in general, the absence of a kitchen or baking facilities {especially those living in rented rooms}, preference for ready-to-eat cakes which are available at food-counters of supermarkets or at other eateries such as coffeehouses and hotels. The second important factor that deters non-users, however, is directly attributed to taste. The main objection is that cakes from premixes have an artificial flavour. Only further research can indicate if this reason is psychological or real, as half the ingredients such as eggs, butter, etc. have to be added by the baker himself. Others complain that cakes from pre-mixes do not rise well and generally have a dry texture, though some brands are said to have such problems more than others. It is noted that some of the interviewees who have not tried the local brand hold the assumption that the local brand will not match up to imported brands in terms of taste or flavour. This may reinforce the suspicion that psychological obstacles do exist in the market for cake mixes in general and for local brands in particular. Again, price is not an important factor for non-acceptance of the product. Exhibit 7.4 summarizes statistically the motives for product buying/usage and non-buying/non-usage.

EXHIBIT 7.4 Product Buying and Usage Motives (In percentages) Reasons Given Speed and/or convenience Taste Price/economy Other

Buyers/Users

46.9 28.1

Non-Buyers/Non-Users

0.0 14.9

3.1

2.7

21.9

82.4

100.0

100.0

68 Buyers'

INTERNATIONAL MARKETING

Socio-Economic Characteristics

In focusing on the buyers, it is found that about two-thirds of them are actively employed, i.e., working; more than half of them enjoy a monthly income above M$1 ,000; about half of them fall in the 25 to 35 age group; about 86 per cent of them are females; nearly 39 per cent of them are Chinese and 35 per cent of them are Malays; 35 per cent of them come from families with no more than two children; and exactly a third of them are single. In other words, buyers and users are typically relatively young, working, upper-income Chinese or Malay females who are either married with not more than two children or are single. Exhibit 7.5 provides a detailed analysis of all categories of buyers by each of the variables mentioned above.

Buying Habits Cake mixes are purchased mostly in small quantities, not very frequently (with nearly 30 per cent of buyers buying once in three months or longer and only 23 per cent of them buying at least once a month), and usually from supermarkets. "Special occasions" or otherwise do not constitute a significant time for purchase. About half of the buyers state that they do not have any particular brand preference, although White Wings and Betty Crocker are preferred by 19.3 per cent and 10.5 per cent of the buyers respectively. Exactly a third of the buyers prefer chocolate flavoured pre-mixes followed by 12 per cent preferring vanilla and 7 per cent preferring plain cakes. Cheese, banana, coffee, and sultana flavours are each preferred by about 5 per cent of the buyers. However, 12.3 per cent are not particular about the flavour they purchase. Over half of the buyers who purchased more than once before think that existing prices for pre-mixes are reasonable, about 10 per cent reckon that they are unreasonable, whilst another 10 per cent do not find prices reasonable or otherwise. Detailed statistics concerning buyers' purchasing habits may be discerned from Exhibit 7.6.

Existing Market Offerings Finally, in order to understand the market for cake mixes it is important to consider the findings of the survey in the light of what is currently

EXHIBIT 7.5 Socio-Economic Characteristics of Buyers (In percentages) Characteristic

1) 2)

Categories

Working 66.7

Work status

Monthly income

All buyers

Under $500 10.5

$500-$1,000 14.0

Non-working 33.3

100.0

Above $1,000 Undisclosed 52.6 22.9

100.0

----------

3)

Age

Under 25 years 21.0 ----

4) 5)

Over 35 years

49.2

29.8

Malays 35.1

100.0

--------------

Male 14.0

Sex

Race

25-35 years

Female

86.0 Chinese

38.6

Indians 8.8

100.0 Others 17.5 --- --

6)

Family size and status

Single, i.e., 1 person

Married with no children, i.e., 2 persons

Married with 1 or 2 children, i.e., 3 to 4 persons

33.3

19.3

35.1

100.0 ---~~

~

Married with more than 2 children, i.e., 5 persons & more

12.3

100.0

70

INTERNATIONAL MARKETING

EXHIBIT 7.6 Purchasing Habits of Buyers Purchasing Characteristic

1)

Average no. of boxes per purchase 1 or 2 boxes More than 2 Cannot remember Purchased only once before

% of Buyers 52.6

3.5 15.8 28.1 100.0

2)

Frequency of purchase At least once a month Once in 2 months Once in 3 months or longer Cannot remember Only once before

22.8

3.5 29.8 15.8 28.1 100.0

3)

Place of purchase Supermarket Minimarket Grocers Cannot remember More than 1 place

64.9 1.8

3.5 5.2 24.6 100.0

4)

Time of purchase Special occasion No special occasion Cannot remember Only once before

15.8

3.5 52.6 28.1 100.0

5)

Brand preferred No particular preference White Wings Betty Crocker Pilsbury

50.9 19.3 10.5 7.0

MKM

3.5

Others (imported) Undisclosed

7.0

1.8 100.0

Improving the Product of an Overseas Subsidiary

EXHIBIT 7.6 -

Continued

Purchasing Characteristic

6)

71

% of Buyers

Flavour preferred Chocolate Vanilla Plain Orange Cheesecake Banana Coffee Sultana Yellow Lemon Pancake Gingerbread No preference

33.3 12.3 7.0 5.3 5.3 5.3 5.3 5.3 3.5 1.7 1.7 1.7 12.3 100.0

7)

Opinion on existing prices Reasonable Unreasonable Neutral Purchased only once before

50.9 10.5 10.5 18.1 100.0

available on the supply side. Altogether, there are ten brands of cake mixes in the Malaysian market, of which all except Bunga Cempaka are imported. The range of flavours available is extensive by local standards. White Wings from Australia, the most popular brand providing the widest choice to consumers, offers as many as thirty different flavours. The sole local brand is marketed only as a plain pre-mix so as to allow buyers the flexibility of adding preferred flavours on their own. Other brands together with their country of origin and choice of flavours are listed in Exhibit 7.7. It is also observed that many of the imported brands have their pack re-designed very frequently, with almost every shipment. This strategy serves to overcome the buyers' tendency of associating old packaging with old stock, hence the impression that the brand is not moving well.

72

INTERNATIONAL MARKETING

EXHIBIT 7.7 Country of Origin and Number of Flavours by Brands of Cake Mixes Available Country of Origin

Brands

Number of Flavours Offered

White Wings Pilsbury Betty Sidney Edmonds

30

USA

Betty Crocker Aunt Jemina Bisquick

6 2 1

Canada

Robin Hood

5

United Kingdom

Greens

2

Malaysia

Bunga Cempaka

1 (i.e., plain)

Australia

19

5 9

Conversely, a new pack is found to motivate buyers, as they are given to believe that the brand enjoys a high rate of shelf off-take. The main brands are primarily imported by Fitzpatricks and Cold Storage, both of which are leaders in the supermarket and food lines. Acting in the capacity of sole agents for the respective brands, they import in bulk and sell either through their own supermarket chains, or through emporiums, minimarkets, grocers, and other smaller food retailers. Prices for the same brand are usually similar in all types of final outlets. It is therefore evident that mark-up for a particular brand varies significantly amongst different classes of retail food stores. Generally, the larger supermarkets who obtain their supplies directly from manufacturers, enjoy a mark-up of 30 to 40 per cent for imported brands; whilst emporiums and other smaller outlets who rely on sole agents for supplies can obtain gross margins of only 15 to 18 per cent. The local brand, as in the case of many other products, is less lucrative per unit for the retailers who on average sell Bunga Cempaka at only 10 to 15 per cent above cost. Exhibit 7.8 from the survey provides fuller information on the prices of various brands in the market and the major outlets from which they are obtainable.

EXHIBIT 7.8 Prices and Distribution of Brands of Cake Mixes Available Retail Outlets Stacking Brand at Time of Survey Brands

Price Range in M$

Fitzpatricks Asia Jaya, P.J.

White Wings

2.00 to 4.50

.j

.j

.j

Pilsbury

2.00 to 4.50

.j

.j

.j

Betty Sidney

1.30 to 1.85

Edmonds

2.00 to 2.30

Betty Crocker

3.30 to 4.20

Aunt Jemina

2.50 to 3.30 -----

Fitzpatricks Fitzpatricks Am pang, Jalan Chulan K.L. K.L.

Selangor Emporium, K.L.

Weld Super- Jaya Supermarket, market, K.L. P.J.

.j

.j

Thrifty Market, P.J.

Campbell Emporium, K.L.

.j

.j

.j

.j

.j

.j .j

.j

.j

.j

.j .j

.j

------

Bisquick

5.20

.j

.j

.j

Robin Hood

2.90

.j

.j

.j

Greens

1.35 to 2.30

.j

.j

.j

.j

.j

.j

-

---------

Bung a Cempaka

2.20

----

.j

.j

.j

74

INTERNATIONAL MARKETING

Thus far, the local brand is the only product that has attempted to promote awareness and sales through special demonstrations, display, and sampling at major supermarkets in the Kuala Lumpur-Petaling Jaya region. In addition, advertising in the national dailies and an introductory offer of three-for-the-price-of-two have also been noted. In the case of imported brands, promotion comes only in the form of "spillovers" of activities directed to their domestic or main markets, primarily through women's magazines that are also sold in Malaysia. Little has been done either by the manufacturers or their importing agents to run campaigns targetted at the Malaysian market. Sales performance in the recent past shows that on average, supermarkets account for the bulk of the sales, selling about 30 to 40 boxes per week per outlet. Emporiums and mini-markets each retail about 3 to 5 boxes a week, whilst other smaller outlets sell a smaller volume. It is noted that more sales are achieved when special price offers are given. Over the last 3 to 4 years, the volume of sales has been increasing. According to the leading importers, sales have grown by 25 per cent since 1977. However, with the rising level of per capita income, better education, and living standards, and the faster pace of urban living that goes with economic development, the market is expected to expand at an accelerated rate. With the existing scope for greater marketing planning and use of modern techniques, more new entries are expected to compete in the cake-mix market where immense potential exists.

Questions 1. "That the parent company of international subsidiaries not only permits but encourages its subsidiaries to decide on the local product mix is not unusual." Discuss this statement in the context of the case. 2. If you were Encik Othman, do you think the new product proposal is acceptable in the light of the survey? Why? 3. What additional information should Encik Othman and his department consider? Why? 4. If Encik Othman were to recommend the launch of a cake-mix brand, would you endorse his recommendation if you were located at the international division of the parent company? 5. What other alternatives are open to Encik Othman for improving the Malaysian product strategy?

NOTES

CASE 8

Sedap (Malaysia) Sdn. Bhd. (Part II)

Positioning and Promoting Internationally In early 1980, Encik Othman Halim wrote to the vice-president in charge of the international division to ask for more time to work on a few marketing issues in greater detail and to prepare a crude financial analysis for the proposed cake-mix project. In his communication, Encik Othman briefly explained his department's line of thought and the kind of product they had in mind.

Reaction at Head Office Initial response at the U.S. office was favourable for several reasons. First, the company already has a well established regional brand of cake mix in the U.S. market. Besides, the product has made satisfactory progress in two European countries although marketed under different brand names. It is thought that with its proven qualifY- the same product will go well with Asians - after all, cakes prepared by the process of baking originated from the West. Modern Asians are known to accept Western foods, especially the new varieties and flavours offered by imported products. Secondly, the company may exploit the attitude amongst many Asians, including Malaysians that "imported brands are better". Despite the fact that a substantial portion of Sedap's products are obtained within the country, new products are usually entirely imported until a steady foothold is gained or until local substitutes of comparable quality can be found. Competition from local brands for such a product is not considered serious despite their usual lower price. This is particularly the case when the image of the new brand is well supported by media promotion. 77

78

INTERNATIONAL MARKETING

Thirdly, economies of advertising may be derived if films developed for existing markets elsewhere are adapted for Malaysia. After all, the theme of "speedy convenience with the right taste" appears universal enough to be of general appeal. Moreover, the latest presentations of the advertising theme do not connote the setting of a particular culture. However, it is acknowledged that initial investment in a large advertising budget is crucial for winning over users of other brands, for convincing first-time buyers, and for maintaining repeat purchases.

Questions 1. Do you agree with the underlying premise that human needs and wants are universal, especially for a food product? 2. What cultural difficulties would you anticipate in the cake mix market of Malaysia (or of Asia) with regard to a brand that is "imported" despite the general belief that foreign products are superior in quality? 3. In your opinion, what constitutes the "product package" that Sedap tries to sell in the case of a cake-mix brand? 4. What are the major constraints of using an advertising film that is developed outside Malaysia?

NOTES

CASE 9

Anggerik Sdn. Bhd. (Part I)

• Analysing Decline 1n Export Sales Anggerik Sdn. Bhd., an orchid growing and exporting firm, has been running at a loss since its inception. The continual loss is attributed mainly to poor sales in the international market which has been dominated by Thailand and Singapore. The management of Anggerik feels that the only way to get out of the red is to intensify marketing efforts overseas. One way of increasing sales is possibly by employing a new strategy altogether.

The Company Anggerik is a subsidiary of a property and real estate group. The idea of venturing into orchids was first mooted by the chairman out of personal interest and sheer coincidence. It was through one of his land deals that the chairman bought over a small orchid farm. Anggerik was incorporated in 1972 with an authorized share capital of M$3 million. To date, the company has two orchid farms, one in Penang and the other in Selangor, with a total of thirty farm workers. In addition, an orchid consultant is employed to supervise both the farms on a full-time basis. The cost of maintaining the farms and other related expenses was estimated at around M$30,000 per month over the fiveyear period 1973 to 1977. Though the farm in Penang is larger in size, the cost of maintenance per acre is lower on average, as the species of orchids grown require less cost per acre than those cultivated on the Selangor farm. The breakdown of acreage, work-force, and maintenance costs for the farms are shown in Exhibit 9 .1. 79

80

INTERNATIONAL MARKETING

EXHIBIT 9.1 Breakdown of Anggerik's Acreage, Work-force, and Maintenance Cost

Size in acres No. of persons employed Maintenance cost per month in M$

Farm in Penang

Farm in Selangor

18 18

13

$10,000

$20,000

12

Export Sales For•the period 1973 to 1977, the export sales of Anggerik are as shown in Exhibit 9.2. The decline in sales was due mainly to poor demand that resulted from recessionary conditions overseas during the five-year period. Generally, it is known that the demand for orchids is extremely volatile, varying with the economic and climatic conditions of the importing countries. Sometimes, no sale at all is made during the summer months in the buyer countries when supplies of fresh-cut locally grown flowers are readily available. Hence, demand for imported orchids is seasonal in nature.

EXHIBIT 9.2 Export Sales Turnover of Anggerik Sdn. Bhd. (In M$ thousands)

1973 1974 1975 1976 1977

220 200

197 170 140

Products It is known that orchids have certain qualities that enhance their export value when compared with other flowers. Apart from being naturally beautiful, rich in variety with almost every colour to suit colour

Analysing Decline in Export Sales

81

preferences, orchids have the added quality of being long-lasting. Anggerik exports several species of orchids. They include Ananthera James Storie, Ananda Wendy Scott, Ananda Christine, and Ananda Mixed; Arachnis Maggie Ooi and Red Ribbon; Dendrobium Pompadour, Dendrobium Alice Chong, and Dendrobium Valley King; Oncidum Golden Shower and Yanda Tan Chay Yon. Similar varieties are also grown and exported by Singapore while Thailand exports mainly Dendrobium Madam Pompadour. Generally, the popularity of a species depends on its appearance and colour. The darker varieties are preferred by foreign buyers for their "exotic" qualities.

Grading Grading is necessary for two purposes. First, to sort into "/\' or "B" grades (as discussed later) and secondly, to ensure that the flowers for export are fresh, unblemished, disease free, and grown from well established and strong plants. Careful grading is undertaken at the farm.

Branding Orchids exported by Anggerik do not have brand names. Instead they are distinguished by the names of their species (for example, James Storie, Maggie Ooi, etc.).

Packing The perishable and fragile nature of the product adds to the risks involved in the marketing of orchids. To protect the flowers - especially to withstand changes in climatic conditions between Malaysia and the importing countries - orchids from Anggerik are packed in polythene bags, each containing an average of twenty stalks of the same variety. They are then placed in corrugated cardboard boxes dotted with airholes. The boxes are then quickly transported by van to Anggerik's export agent, Island Export Sdn. Bhd.

82

INTERNATIONAL MARKETING

Pricing Anggerik does not follow a definite set of procedures and policies for pricing. The market trend serves as a guide for the setting of price. However, the price for each stalk ex-farm is determined by the supervisor and the orchid consultant of the company. Prices of orchids have been observed to be rather constant at the production level. But this does not result in similarly constant prices at the wholesale level in importing countries because of strong competition from locally grown flowers. Moreover, with high import duties plus the fact that duties are levied on c.i.f. values (that is, including freight) orchids have to be retailed at relatively high prices. This puts orchids at a disadvantage, compared with locally grown flowers of the importing countries. Exhibit 9.3 shows the f.o.b. prices of some varieties of orchids in 1983.

EXHIBIT 9.3

F.o.b. Prices of Selected Varieties of Orchids (In M$)

Maggie Ooi Dendrobium Christine James Storie Golden Shower Wendy Scott

"B" Quality per stalk

"A:' Quality per stalk

0.15 0.70 0.50 0.50 0.50 0.25

0.20 0.80 0.60 0.70 0.55 0.35

Note: The basis for differentiating an "A:' quality stalk from a "B" quality stalk lies solely in the length of the stalk. An "A" quality stalk has at least two flowers more than a "8" quality stalk. Quality-wise, flowers of the two grades are the same. Mark-ups for cut flowers in Europe vary from 10 to 15 per cent at the import wholesale level and 60 to 150 per cent at the retail level. In the case of Maggie Ooi, a low-priced orchid, the freight cost could be as high as the f.o.b. price. Hence, importers are not too interested in asking for a lower f.o.b. price because it has little bearing on their final selling price. The price structure shown in Exhibit 9.4, which is

Analysing Decline in Export Sales

83

EXHIBIT 9.4 Price Structure of Maggie Ooi Species

M$ F.o.b. price per stalk Freight & insurance C.i.f. Prices Customs duties: 15% Handling charges Cost Price to Importers Importer mark-up: 20% Wholesaler's Cost Price Wholesalers' mark-up: 80% Retailers Cost Price Retailers mark-up: 150% Retailers' Sales Price Turnover tax: 5.5% Price to Consumers

%

7.9

0.20 0.15

5.9 0.35

0.05 0.02

1.9

0.7 0.42

0.09

3.5 0.51 16.6

0.42 0.94 1.46

58.4 2.40 5.1

0.13 2.53

100.0

known to be typical of that for Maggie Ooi, illustrates how final prices for orchids are determined overseas. Special commodity rates are granted by the airlines for the transportation of orchids from Malaysia and Singapore for shipments that exceed 45 kilograms. Exhibit 9.5 shows the air freight rates applicable to orchids for 1983.

Distribution It is a characteristic of the flower trade that no stock is kept at any stage of the distribution process. To avoid spoilage of the flowers, the distribution chain has to be kept as short as possible. Anggerik realizes that the export of Malaysian orchids is hindered by an inherent weakness in the internal collecting and marketing system for orchids. There appears to be an acute shortage of physical handling and distribution facilities to collect freshly cut orchids from various farms for export purposes.

84

INTERNATIONAL MARKETING

EXHIBIT 9.5 Air Freight Rates for Orchids, 1983 Kuala Lumpur to Amsterdam London Paris Frankfurt

Minimum Charge M$

Below 25 kg. M$ per kg.

98.57 94.05 89.57 89.57

9.88 9.73

25 kg.-45 kg. M$ per kg.

Above 45 kg. M$ per kg.

8.66 8.90 11.19 8.76

8.35 8.47 8.61 8.35

Anggerik has been exporting through its appointed export agent Island Export Sdn. Bhd. Under the arrangement total reliance is placed on the exporter for matters pertaining to export documents, shipment, currency arrangements, taxes, tariffs, etc. The agent is also given the discretion to fix wholesale prices.

Promotion Anggerik has participated in trade expositions held overseas in Frankfurt, Berlin, Australia, Kuwait, and London, organized by the Malaysian Government from time to time. Usually, no personnel are sent to the expositions to represent the company. Only the flowers are sent. Thus, such promotions do not exceed M$500 per exposition.

Domestic Competition In Malaysia, Anggerik is the third largest orchid grower in terms of acreage after Asia Orchid Sdn. Bhd. in Johore with about 120 acres and Tropical Orchid Sdn. Bhd. with about 105 acres. The rest of the growers are either very small (by acreage) or are hobbyists who cater to the local market. As far as Anggerik is concerned, such small cultivators do not pose any threat as long as they continue serving the local market, for Anggerik is mainly interested in the overseas market.

Foreign Competition Thailand and Singapore are the two largest growers and exporters of tropical orchids in the world. Exhibit 9.6 provides information on

Analysing Decline in Export Sales

85

EXHIBIT 9.6 Export of Cut Flowers (In US$ thousands) Year

Thailand

Singapore

Malaysia

1977 1978 1979 1980 1981 1982

6,413 9,220 18,478 20,755 18,511 n.a.

4,852 5,981 6,783 8,103 7,791 7, 100*

899 1,086 11190 1,246 974 1,299*

* Estimates. Source: United Nations, Yearbook of International Trade Statistics, Vol. II (New York, 1982). export revenue of cut flowers of Malaysia, Singapore, and Thailand for the years 1977 to 1982. Singapore, with export sales six to seven times higher than that of Malaysia, is second in the orchid trade in the ASEAN region. Malaysia ranks third after Thailand and Singapore. At one time, Thailand lagged behind Malaysia in the orchid trade. In the late 1970s, however, Thailand overtook Singapore and Malaysia to emerge as the leading orchid exporter in the world. The slow growth of orchid exports from Malaysia is attributed to the lack of an organized and systematic approach to the development of orchid growing. As a result, the number of varieties and supplies of each species are limited. Moreover, inadequate airline services linking Malaysia with the importing countries is another reason for the slower growth of Malaysian orchid exports to Europe. Very often, Malaysian orchids are regarded as Thai or Singapore exports as they are re-freighted from Bangkok or Singapore. The cultivation of orchids in Thailand is certainly better organized with a special Orchid Board overseeing the industry. Thai growers are encouraged to develop new varieties. In 1976, Thailand exported about US$5 million worth of orchids, mainly to Sweden, Norway, and Finland. Although the orchid industry of Singapore is smaller in scale than that of Thailand, it is making tremendous progress. In particular Multico-Orchid Singapore (Private) Limited is seen as a major threat

86

INTERNATIONAL MARKETING

to Malaysian exporters of fresh orchids. In 1974, the Singapore Institute of Standards and Industrial Research perfected a method of preserving individual orchid blooms in gold, hence giving rise to a highly successful jewellery and souvenir industry utilizing orchids.

International Demand Characteristics The demand for orchids is seasonal in nature. Demand generally picks up from mid-September onwards reaching a peak in November and December. Winter orders normally arrive in January, February, and early March. Orders usually slow down slightly in April but increase again in May until Mother's Day around the middle of the month. During the summer months of June, July, and August, demand drops significantly in Europe. Some exports are made, however, to Australia and New Zealand during these months. Singapore has traditionally been the largest importer of Malaysian cut flowers and buds for the purpose of re-export. In 1981, for example, Singapore accounted for about 77 per cent of the orchids exported from Peninsular Malaysia. Apart from Singapore, the Netherlands and the Federal Republic of Germany are also important buyers of Malaysian orchids. Besides catering for their home markets, the latter two buyers also re-export to other EEC countries. The quantity imported, however, is heavily dependent on the economic conditions of the final importing countries. Australia, Switzerland, Sweden, Japan, Italy, and France also import orchids from Malaysia. Towards the end of the 1970s, Kuwait, a potential new market had indicated an interest in Malaysian orchids. Exhibit 9.7 shows exports of cut flowers and flower buds from Peninsular Malaysia. Although the statistics do not distinguish orchids from other cut flowers, it is realistic to expect that the bulk of the flowers exported, especially to the EEC, are only orchids, whilst flowers exported to Singapore consist of both orchids and chrysanthemums.

87

Analysing Decline in Export Sales EXHIBIT 9.7 Export of Cut Flowers and Flowers Buds from Peninsular Malaysia, 1972-82 (M$ f.o.b.) Destination

1972

Federal Republic of 4,450 Germany 35,062 Netherlands 656,003 Singapore 18,907 United Kingdom Sweden Italy 979 France 1,456 Belgium-Luxembourg 90 Australia 10 Japan 10 Switzerland USA Canada Kuwait Thailand

Destination

1973

1974

739 21,027 854,765 13,146 20 20 3,557

44,805 21,457 1,288,764 3,690 1,838 2,847 2,250 1,270 965 2,847 105

1,432 208 220

1978

1979

254,7 46 382,480 1,754,467 3,145

182,573 443,060 1,794,808 8,839 1,200 28,500 11,120 4,520 19,949 31,050 50,131 670

1975

1976

187,668 88,971 1,666,403 5,672 750 75 1,070 8,940 11,620 345 4,785

1977

104,850 227,567 1, 947,026 3,449 910 100 1,210 3,590 4,429 1,025 8,923 100 175 439 380

142,509 300,174 1,687,013 2,228 390 3,675 540 2,971 4,997 13,418 3,358 22,781

1981

1982

72,242 288,222 2,192,196 2,809 356 33,515 1,695 100 6,572 4,225 67,710 1,665

48,77 4 178,549 2,263,777 1,954 316 27,337 1,024 350 14,484 1,240 60,710 2,332

35,881 105,560 2,376,815 885

280

300

1980

Federal Republic of Germany Netherlands Singapore United Kingdom Sweden Italy France

Belgium-Luxembourg Australia Japan Switzerland USA Canada Kuwait Thailand

7,175 530 500 43,535 750 19,917 6,601 1,960 11,230 535

Source: Department of Statistics, Malaysia.

4,728 1,080 37,594 2,630 91,385 1,022

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INTERNATIONAL MARKETING

Questions

l. Discuss the problems and possible weaknesses of Anggerik Sdn. Bhd. 2. How would you assess the current position of Anggerik Sdn. Bhd. in the international scene for orchids? 3. What alternative approaches may be taken to overcome the problems and weaknesses identified above? 4. In your opinion, would the problems associated with price escalation in international marketing be applicable in this case? 5. For the product marketed by Anggerik, to what extent do you think the exporter can increase sales overseas by influencing price? 6. In view of the high mark-up by distributors, would you suggest shorter, more direct methods of selling overseas?

NOTES

CASE 10

Anggerik Sdn. Bhd. (Part //)*

Planning for New International Distribution Strategy In the early 1980s the management of Anggerik Sdn. Bhd., an exportoriented firm, felt that the company had not been progressing as well as other sister companies in the corporate group to which they belong. It was felt that attention should be given to deliberate planning of a distribution strategy, so as not to rely entirely on the export agent and gradually to exercise more control over the sale of orchids overseas. Before a new international distribution strategy was formulated, it was thought that more knowledge of the international trade in fresh cut orchids was required. For a start, Encik Ismail Ali, an executive, was given the responsibility of carrying out a quick study of various international markets from secondary sources. The following is information contained in a memo prepared by Encik Ismail Ali to the management of the company. As noted in the report, most of what is known is based on surveys carried out in various countries by the Ministry of Trade and Industry of the Malaysian Government.

The Netherlands The Netherlands is the second largest importer of Malaysian orchids. Every year orchids account for about 20 per cent of all fresh cut flowers imported into the Netherlands. (See Exhibit 10.1 for the Netherlands' imports of cut orchids.) It is estimated that about 75 to 80 per cent of the imported cut flowers are re-exported by specialized importers to other EEC countries. The main supplier of orchids to the Netherlands is Thailand, accounting for 56.6 per cent of the Dutch orchid market. Singapore ranks

* For background to this case, read Anggerik Sdn. Bhd. (Part 1). 89

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INTERNATIONAL MARKETING

EXHIBIT 10.1 Netherlands: C.i.f. Value of Imports of Fresh Cut Orchids (In thousands of guilders) Countries

1974

1975

1976

1977

1978

Thailand Singapore Malaysia Australia

2,505 2,331 26 537

3,750 3,604 64 524

5,616 5,623 381 617

6,528 5,151 1,048 968

7,812 3,673 1,614 696

Total

5,399

7,942

12,237

13,695

13,795

Source: Malaysian Trade Commissioner.

second supplying 26.6 per cent of the orchids imported, whilst Malaysia and Australia supply 11.7 and 5.0 per cent respectively. Exhibit 10.2 summarizes the market shares by supplying countries. Import trade in fresh cut flowers is divided into two seasons as far as the Netherlands is concerned: Summer season Winter season -

from 1 June to 31 October from 1 November to 31 May.

Festive seasons such as St. Valentine's Day in February, Easter in April, Mother's Day in May, St. Nicholas' Day in early December, Christmas and New Year in late December are significant for the orchid trade. EXHIBIT 10.2 Netherlands: Market Share of Orchids by Supplying Countries (Based on volume, in percentages) Countries

1974

1975

1976

1977

1978

Thailand Singapore Malaysia Australia

43.1 50.4 0.9 5.6

42.8 52.9 0.9 3.4

45.3 48.4 3.3 3.0

49.4 37.6 8.7 4.3

58.2 26.8 12.1 2.9

100.0

100.0

100.0

100.0

100.0

Total

Source: Malaysian Trade Commissioner.

Planning for New International Distribution Strategy

91

Import Restriction Imports of cut flowers into Holland from non-EEC countries are subject to common market external tariff and regulations of the EEC although no quantitative restriction on import is enforced. As expected, imports from other EEC countries are free of restrictions, either tariff or non-tariff. As the value of orchids imported into the Netherlands is relatively small thereby posing little competition to local producers, orchid imports are not subjected to any form of quantitative restriction.

Import Duty Import duty on cut flowers is levied on their c.i.f. values. A two-tier tariff system is followed, depending on the time of year. Summer season - 1 June to 31 October Import duty charged at 24 per cent; Winter season - 1 November to 31 May Import duty charged at 17 per cent. However, orchids are included under the Generalized System of Preferences where import of fresh cut flowers such as orchids into the EEC from developing countries (including Malaysia} are eligible for preferential import duty of only 15 per cent irrespective of the time of the year. In addition to c.i.f. costs and import duty, a value added tax of 4 per cent is levied.

Modes of Payment Customary modes of payment such as letters of credit used in most international transactions are not applicable to the orchid trade. In most instances Dutch importers insist on paying by means of bank draft or cheque. Most Dutch importers pay their suppliers by bank draft for deliveries which may be as frequent as two or three times a week. There are also cases where importers issue fortnightly or monthly cheques to the exporter's correspondence bank in the Netherlands for payment.

92

INTERNATIONAL MARKETING

Credit Terms

Payment by cheque or bank draft on a monthly or fortnightly basis, inherently amounts to the granting of credit to the importer. Dutch importers, however, do not regard such financial settlement methods as credit. They argue that such forms of payment facilitate correspondence and accounting. Other forms of credit or credit for longer terms are not commonly found.

Switzerland The total import of cut flowers into Switzerland averages around 120 million Swiss francs per year. Orchids account for 2.5 per cent of the cut flowers imported. The Malaysian share is estimated to be around 0.1 per cent of the total market. Amongst popularly demanded species are the Maggie Ooi, Cymbidiums, Dendrobium, and Arachnis. It is noted that orchids are imported mainly as substitutes to European cut flowers in winter months. The normal rate of import duty is 25 Swiss francs per 100 kg. Import is subject to licensing from l May to 25 October. Imports during other periods are free from licensing. Orchids are imported by specialized importers who have facilities for storage, re-packing, and distribution to chain stores, department stores, and supermarkets.

Australia In general Australia is not a large importer of flowers. With respect to orchids, Australia produces certain species such as the Cymbidium. Orchid imports are mainly confined to the more exotic varieties that either are not grown in Australia or are not readily available. Amongst popular varieties are the Sinopis, Catelene, St. Valdiam, and Bridal. They are retailed between A$1.00 and A$2.50 per stem. Demand is markedly higher between the months of March and December. Currently, import of orchids is free from duty. However, intending exporters are advised to check with the Bureau of Customs in the Department of Business and Consumer Affairs of Australia from time to time, as rates of duty may be charged without notice. Fresh cut flowers entering Australian markets are subject to quarantine and must be inspected by quarantine officers on arrival. Flowers

Planning for New International Distribution Strategy

93

that are found to be or are suspected to be diseased may be destroyed or re-shipped at the owner's expense.

Germany The Federal Republic of Germany is one of the world's largest buyers of fresh cut flowers. As much as 65 per cent of the country's demand for orchids is for the Dendrobium, 15 per cent for Maggie Ooi, 10 per cent for Ananda Christine, and 4 per cent for Wendy Scott. In recent years the import of cut flowers has been increasing at 35 per cent per annum. The increasing demand is attributed to high oil prices which renders it uneconomical for local farmers to grow flowers in glasshouses during the winter months. As in other countries, import demand is subjected to seasonal variation. From June to October duty is levied at 24 per cent whilst the lower rate of 17 per cent is charged for other months of the year.

Canada The potential for Malaysian orchids appears limited in Canada despite the very large market for cut flowers in the country, valued at about M$373 million a year at the retail level. Domestic production of roses, chrysanthemums, carnations, tulips, narcissus, and daffodils amounts to only M$168 million. A large quantity of Cymbidium is imported from Australia with the help of very attractive freight rates. Over the last few years, the increasing cost of transport resulting from higher fuel costs has encouraged greater domestic production, hence reducing the import of flowers. A single bloom of imported orchid may be retailed at as high a price as C$10 (that is, M$19) though on average orchids are sold at around C$9 (that is, M$17). At times, retail profit margin may be as large as 300 per cent. It is known that 75 per cent of the market for orchids in Canada is handled by a single importer, l.e Nobel Orchids of Vancouver, who deals with approximately l4 million blooms per annum. Exhibit 10.3 shows import of cut flowers into Canada between 1975 and 1979.

94

INTERNATIONAL MARKETING

EXHIBIT 10.3 Canada: C.i.f. Value of Import of Cut Flowers (In C$ thousands)

1975

1976

1977

1978

1979

France USA Netherlands Italy Spain Colombia Brazil Israel Mexico Taiwan Australia

60 10,399 576 350 12 464 47 29 64 23 136

47 12,993 781 507 20 1,331 128 45 102 34 23

82 11,967 1,301 364 41 1,952 155 95 144 19 28

76 13,276 1,093 353 132 3,185 144 121 185 35

84 13,674 873 284 68 3,878 183 60 226 62 48

Total

12,355

16,232

16,424

18,804

19,707

Countries

72

Source: Malaysian Trode Commissioner.

Sweden Demand for cut Rowers in Sweden is greatly influenced by two factors, the economic condition in the country and national festive seasons. Although the main suppliers of orchids are from Singapore and Thailand, Swedish importers have indicated their interest in examining samples from Malaysia. Generally cut Rowers including orchids are subjected to the following rates of duties when imported into Sweden. Classification

Period

Rate of Duty

BTN No. 06.03.017

1 March to 30 November

SKr 1000/100 kg.

BTN No. 06.03.018

1 December to 20 February

SKr 500/1 00 kg.

The import of orchids is not controlled by quotas. Exhibits 10.4a and 10.4b and Exhibits 1O.Sa and 1O.Sb show orchids purchased by Sweden as well as the sources of supply for BTN 06.03.017 and BTN 06.03.018 respectively.

Planning for New International Distribution Strategy

95

EXHIBIT 10.4a Sweden: Import of Orchid BTN 06.03.017 Import

Export

Year

Quantity in Metric Tons

Value in '000 Skr.

Quantity in Metric Tons

Value in '000 Skr.

1978 1979 1980

517 597 609

24,504 29,905 31,564

n.a.

29 7

Source: MEXPO.

EXHIBIT 10.4b Sweden: Import of Orchids by Country of Origin, 1980 BTN 06.03.017 Country Holland Thailand Italy Singapore South Africa Malaysia

Quantity in Metric Tons

Value in '000 Skr.

399 49 47 15 15 1

20,062 2,951 1,955 1,355 509 133

Source: Malaysian Trade Commissioner.

EXHIBIT 1O.Sa Sweden: Import of Orchids BTN 06.03.018 Import

Export

Year

Quantity in Metric Tons

Value in '000 Skr.

Quantity in Metric Tons

Value in '000 Skr.

1978 1979 1980

178 192 203

11,913 13,015 13,713

n.a.

12

Source: Malaysian Trade Commissioner.

96

INTERNATIONAL MARKETING

EXHIBIT 1O.Sb Sweden: Import of Orchids by Country of Origin, 1980 BTN 06.03.018 Country Holland Thailand Italy Israel Singapore Malaysia

Quantity in Metric Tons

Value in '000 Skr.

88 31 29 21

6,803 2,019 1,572 804 635 114

7 1

Source: Malaysian Trade Commissioner.

Health Regulations No health certificate is required for the import of cut flowers into Sweden, with the exception of carnations.

Local Taxes A value added tax is levied on both local and imported products. As the tax is on the price including import duties, the effective rate amounts to 20.63 per cent.

Pricing Prices at the retail level are found to be highly escalated from the Malaysian f.o.b. export prices, hence the implied difficulties for widening the market.

Samples Import of samples (including advertising materials, catalogues) are duty free.

Distribution Distribution is carried out by specialized flower importers, wholesalers, or Swedish co-operative societies.

Planning for New International Distribution Strategy

97

Mode of Payment

Payments are usually in the form of irrevocable, confirmed letters of credit to begin with, and thereafter cash against documents.

Kuwait The import of cut flowers has been on the increase over the years. Orchids are used for hospitals, homes, and special occasions. Orchids from Malaysia were exported to Kuwait in the early years. Since 1979, however, the trade was discontinued. Kuwait will undoubtedly depend heavily on foreign supplies of flowers as soil conditions are unsuitable for local cultivation. Trade barriers such as quotas do not exist for imports of cut flowers into Kuwait, except for a 4 per cent ad valorem c.i.f. import duty. Cut flowers are usually imported by independent retailers. Exhibit 10.6 shows the main sources of imported flowers into Kuwait.

EXHIBIT 10.6 Kuwait: Import of Cut Flowers C.i.f. Value KD 'OOOs*

Quantity in Tons Main Sources of Import

1977

1978

1979

1977

1978

Egypt Cyprus Malaysia Holland United Kingdom Bulgaria Lebanon Columbia Others

12 15 2 26 10

8 21 1 26 5 4 20

822

17 22 3 46 19

9 29 1 43 8 5 26

17

Total

82

35 4

1979

11 32 64 7

20

18 12 22

24

31

25 21 34

105

121

131

152

194

* KD 1 = M$8.00.

Source: Malaysian Trade Commissioner.

98

INTERNATIONAL MARKETING

Questions 1. Do you think there is enough information for management to plan a new international distribution strategy? 2. What alternative distribution strategies would you enumerate for management's consideration and which would you select? 3. Outline a proposal for the implementation of the strategy or strategies you have selected. 4. Comment on {a) the debate between Dutch importers and orchid exporters with regard to the method of payment and credit terms; (b) the Swedish practice of starting off with irrevocable, confirmed letters of credit and subsequently paying by cash against documents.

NOTES

THE AUTHOR SIEH LEE MElliNG, Ph.D., is Associate Professor in Business Mministration, Faculty of Economics and Mministration, University of Malaya. She is also a consultant at national and international levels for corporations, industrial organizations, government departments and international agencies. She has published numerous articles, papers, and books/monographs, including The Strudure of Retail Trade in West Malaysia 097 4); Marketing Management Cases in Malaysia (1979);

Ownership and Control of Malaysian Manufacturing Corporations (1982); Commercial Marketing of Contraceptives in Malaysia: The Distributors 0983); The Services Sector in Malaysia (1984).