Executive Summary
This study is concerned with US major Sara Lee’s proposed forays into the North American markets, especially Venezuela. This is timely and strategic since Venezuela happens to be an important trade partner of the US and a major supplier of petroleum products to this country. However, Sara Lee’s entry into Venezuela is not without its share of risks and challenges. For one thing, marketing in unknown terrain and culture is fraught with risks in terms of local government laws, public sentiment, and other factors. For another, the current economic and political scene in Venezuela needs a lot of improvement, with, or without the present incumbent, President Hugo Chavez.
However, considering the brand image that Sara Lee has built over its working years, and the ready acceptance of its products in many destinations of the world, Latin American included, it is seen that this would be a success in the long term.
Counter-trading is advisable since the country has a weak currency. Food for oil would be advisable under the present circumstances.
In the case of Sara Lee, it is seen that it should locate manufacturing activities where economic, political, and cultural conditions, including relative factor costs, are most conducive to the performance of exports to Venezuela.
The main impediments would be in terms of the volatile political situation in the country, coupled with the low income of the people despite the oil boom.
However, it is believed that the climate is favorable for trade, and given a set of favorable circumstances, it could be well within Sara Lee’s corporate objective to pursue trade with Venezuela, not only because of US strategic connections with that country but also because this could offset trade in local US markets and be a steady outsource for American products in the region.
Again, given the fact that US Venezuelan relations are robust, it is believed that all forces positively contribute to better trade with Venezuela.
Outline
The main aspects that have been considered are the risks and challenges that beset Sara Lee’s entry into Latin American markets.
This study also considers the different instruments that are used during export trade and also how institutional financing and assistance could help Sara Lee meet their objectives in Venezuela.
The different options available to Sara Lee in terms of setting up production units make or buy decisions and also different aspects that impact such agreements are considered.
Finally, the study also takes an optimistic view of these export ventures and believes that in the long term, it would justify the costs and faith put by Sara Lee and the American government in export zones like Venezuela.
Introduction
Sara Lee is a major US conglomerate, dealing in high-quality food products, air fresheners, consumer products, and cleaning products, including the famous Clorox range of products.
“In fiscal 2008, Sara Lee generated more than $13 billion in net sales across approximately 200 countries. The Sara Lee community consists of 42,000 employees worldwide.” (Duran & Cummins, 2009, p.2).
It is seen that Sara lee now wished to make forays into the Latin American markets, like Peru, Colombia, Chile, Argentina, Uruguay, Venezuela, etc. The main aspects about these markets are that they are growing ones, where there are robust demands for products sold by Sara Lee. It could also be seen in terms of the fact that exports into these countries would strengthen the distribution and logistics of Sara Lee and would also provide marketing expertise for their products and utilities like air fresheners and Clorox products.
Why choose Venezuela?
Venezuela is one of the Latin American governments that has a distinct propensity for poverty eradication and ameliorating the lot of the poor. As a matter of fact, it is a country in which the government expenditure during 2002 is estimated to be 29.4 % of GDP, as against 18.8% in 1999, a rise of 10% in just three years. A major part of government expenditure is towards providing basic necessities to its people, like food, provisions, etc. (Rodriguez, 2008, p.1).
“Partnering with The Clorox Company provides an exciting opportunity to expand our global
reach in household products by entering the growing Latin American market,” said Vincent
Janssen, chief executive officer of Sara Lee’s International Household & Body Care division.
“It’s a win-win for both companies, as it combines proven innovative products with great
distribution and marketing expertise.” (Duran & Cummins, 2009, p.1).
Pros and Cons of a Venezuelan partnership:
The main promise and pitfalls of exporting to Venezuela would be in terms of the fact that the Sara Lee could develop integrative trade links with this country, thus it would be a beneficial situation for both countries, with major marketing outlets for the provider, Sara Lee, being a source of products and services for Venezuelan people.
Again the Chavez Government has tried, within its limited means to usher in a poverty-free country, and it has been successful in no small measure. Whatever his detractors may say, it would be untrue to say that President Hugo Chavez has not worked for the betterment of his people, since the situation when he came to power some 10 years ago was much worse than what it is today.
He has made health carefree to the people of Venezuela and this is a remarkable step, in that this is the first Latin American country to do so.
However, the country is not politically stable, with frequent riots and political violence. President Hugh Chavez’s populist policies are now not as popular as they were a decade ago, and many student forums and opposition parties have openly challenged or rejected his reformist overtures.
The Chavez government has nationalized many industries and canceled the licenses of foreign firms and products, thereby increasing the risks of investments of foreign investments in the country. In real political terms, even the days of the present government are numbered.
Food for oil
However, the question that would arise, especially in the case of a poor country like Venezuela whose main source of earnings is oil revenues – how would the administration feed their growing population?
Although there have been many poverty eradication programs in Venezuela, they could not be fully implemented by the Hugo Chavez government, thus in the absence of a clear-cut foreign policy and a strong administration, the future of FDI’s and their stakes in oil-rich Venezuela is also fraught with risks. However, as far as American interests in Venezuela are concerned, it is seen that Venezuela “ranks as a leading supplier of imported crude and refined petroleum products to the United States.” (Venezuela Profile: Petroleum and other resources, 2009).
Improving export performance
It is seen that even though there have been areas of conflict, the US and Venezuela remain strong partners in progress. During 2007 trade touched nearly US$ 50B, with Venezuela exporting US$ 40B worth of goods and importing from the US nearly US$ 10B, accounting for nearly 22% of total imports of Venezuela. It is expected that in the coming years, Venezuelan exports could touch $50B,
In the context of Sara Lee’s forays into Latin American markets, particularly Venezuela, especially in the present context, this could be favorable since the currency has been devalued and therefore, Foreign direct investments could be at a premium in Venezuela. Again majority of the population, nearly 90% live in urban areas (cities like Caracas, Maracaibo, Valencia, etc). Another important factor as far as Sara Lee is concerned is that more than 50% of the Venezuelan population is young. Thus they could be prime targets for Sara Lee products, and with growing economic growth and urbanization, Sara Lee‘s success in this Latin American market could be quite assured, given the upward boost to the economy rendered by oil reserves.
However, in the present context, it is seen that the world oil prices are down, and this has caused Venezuela to cut down its oil production by barrels/day in accordance with OPEC Directives.
Sara Lee‘s Export Strategy unraveled
Coming to its export strategy, it is best that it follows the counter trading systematical investments in the Venezuelan urbanized region in order to get returns and profits over time.
This is because Sara lee deals with a plethora of products including garments, good products, cleanliness and hygiene products, and so on. Through counter trading, it is possible to block the entry of competitors into the Venezuelan market, who would otherwise be interesting in investing in developing economies like Venezuela, thus blocking Sara Lee’s entry into this market.
American Venezuelan relations
The aspects that would favor Sara Lee are that it is an American Company and an important trade partner for Venezuela. Over the years, their trade growth has increased and is set to cross the $50 billion mark by the end of this decade. It is also possible that American shares Venezuela’s concern for global growth and her interests in the oil business are not waning. Again, Venezuela’s memberships in international forums like WTO, OPEC, etc, also ensured that it is well represented in important deliberations not only on oil issues but also other trade matters.
How to export financing could help Sara lee
The basic steps in export financing could be routing through the Export-Import Banks (Exim Bank). Sara Lee could also take the help of the Foreign Credit Insurance Association in order to have safe and reliable export financing. This could be seen in terms of the fact that as exporters, Sara lee would be more interested in receiving payments either through the bank or in advance. This would ensure that Sara lee is not put into losses of the goods having been dispatched and sold by the seller, but payments not forthcoming to the seller. In such situations, it would be necessary for Sara Lee to seek institutional guarantees from the buyer’s bankers in order to secure payments. Insurance companies undertake to underwrite the risk of the buyer, or seller during the course of integrative trade. Thus it is seen that both Exim Bank and Foreign Credit Insurance Association could be instrumental in helping Sara Lee promote their export business in Latin American countries, including Venezuela. This could be done by promoting and easing Venezuelan trade and providing financial and insurance facilities to Sara Lee’s export division
It could also be in terms of stimulating banking business to help Sara Lee in their exports business in terms of guarantees, opening Letter of Credits, Bills of Exchanges, foreign currency and help Sara Lee getting speedy payment for their export shipments to Venezuela. It could also be in terms of setting up American trade agencies in Venezuela who could help local businessmen gain valuable information about how better trade links could be opened up with US food products and consumer goods major Sara Lee.
Letters of Credit
Now, coming to a major aspect of trade, that is opening letters of credit. It could be said to be an order given by one bank, to its correspondent bank or agent in another country, to honour all bills of exchanges, payment demands drawn by the exporter on the importer, or his bank on presentation of specific shipment documents. In other words, “A letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase.” (What does letter of credit mean, 2009).
Under the normal circumstances Sara Lee would be dealing with Venezuelan importers about which Sara Lee has no previous dealings; again, their ability to make payments is also not known. Under such circumstances, Letter of Credits is attractive because both parties are likely to trust a reputable bank even if they do not trust each other. The system works this way. Sara Lee’s bankers in the United States draws a LOC instructing their bankers or correspondent banks in Venezuela in Venezuela to clear the shipment. One copy of the LOC is sent to the importer and one copy travels with the shipment. Upon the shipment reaching Venezuela, the local bankers inform the importers of the arrival of goods and the need to clear the shipment. Upon presentation of documents and payment, and the verification of authenticity of the importer’s claim, the goods are handed over to importers by the bank in Venezuela.
Bill of Lading
Coming now to the bill of lading, it is issued to the exporter by the shipping or carrier transporting the shipments to the importer’s destination, mostly through sea routes. In legal parlance, a bill of lading is “legal document between the shipper of a particular good and the carrier detailing the type, quantity and destination of the good being carried. The bill of lading also serves as a receipt of shipment when the good is delivered to the predetermined destination.” (Bill of lading, 2009).
The main idea behind BOL is that it serves as proof that undamaged and goods in perfect condition have been placed to the carrier for onward transmission to the importer. Bills of Lading need to be clean in that the goods need to be delivered in the same condition in which they have been placed on the ship by the exporter. If any issues arise as to quality deterioration or transshipment, the carrier would be held responsible. This is important since Sara Lee is dealing with food products and other perishable product lines which could incur problems during trans-shipment. Therefore, Sara Lee needs to make sure that shipped goods reach destination Venezuela within reasonable time and in good condition. If the Venezuelan importer declines to accept the shipment, the Bill of Lading would play an important role in sorting out upon whom the onus of responsibility lies- the exporter, the owner of the carrier, the ship’s captain or carrier company, or the importer.
Export-Import Bank
This is the official export credit agency of the US. It renders services in terms of financing the export of goods and services to international destinations. Its ambition is to help companies like Sara Lee establish robust export links, especially in Latin American countries like Venezuela, a major US trade partner. This bank takes over charge of credit and country specific risks those private players would be unable to take up. Another aspect is to create a equal playing field for American Sara exporters, vis-à-vis exporters from other countries underpinned by their respective governments.
Sara lee could approach ExIm bank for providing “working capital guarantees (pre-export financing); export credit insurance; and loan guarantees and direct loans (buyer financing).” (Mission, 2009).
Counter trade: It is often seen that certain countries do not have strong and consistent currencies.
It is also possibly that their currencies are non-convertible against other currencies, and are usually tied up with other currencies, especially in the US Dollar. The main idea behind Counter trade is to obviate the need for currency movements between the buyer and seller; instead payment is rendered to the seller/exporter though trade avenues. When the currency of Venezuela is considered, there is no doubt that it is a weak and fluctuating currency , and needed to be devalued even in the recent past. Thus trade could be established with Venezuela through non-currency transactions, in that in return for consumer goods and food products, Venezuela could make payments though its strong product lines like petroleum, etc. Thus it would not be wrong to say that this refers to a range of barter-like agreements that facilitate the trade of goods and services for other goods and services when they cannot be traded for currency; nevertheless it could be used for non-currency trade practices.
Barter is a variation of counter trade through the direct exchange of goods and services between two parties without any cash involvement- just exchange of goods. Coming to counter purchasing it is a form of mutual buying covenant wherein the seller agrees to purchase back certain quantity of materials from the country in which the sale is made.
Offset occurs when one party is ready to buy a certain quantity of goods and services forming a specified proportion of the proceeds of the original sale.
Buybacks occur when, for instance, Sara Lee is agreeable to set up a food product plant in Venezuela on the condition that a certain portion of the plant’s production is taken by Sara Lee as part payment of the covenant with the Venezuelan party.
Switch trading is when a country sells its obligation to purchase goods from a specified country to another country; in other words, the second country is allowed to purchase goods and services although it is not a party to the covenant. This is also a form of purchase endorsement to another party.
Pros and Cons of counter trade as it relates to Sara Lee
It is often seen that trading partners may insist that a certain portion of the contract would be executed through counter trade. In such cases, in order to block the entry of rival firms and competitive forces, it would be advisable for the selling party to take up counter trading, in order that long term trading are met. Again it would offer long term outlets for their produce especially in recessionary times, when these goods may not really sell in local markets. Thus the food products and health care products of Sara Lee could be diverted to Venezuelan markets and revenues enhanced.
The main drawbacks of counter trading are that most sellers would like to received their payments in hard currencies. Otherwise they may be left with worthless goods which cannot be traded and may have to be dumped in countries at losses. The quality and composition of counter traded goods may be of low quality and may not be accepted by other trading partners.
“Countertrade is listening to your international customers and meeting their needs. This could be in the areas of meeting an offset obligation, providing technology transfer, subcontracting, co-production, investment, marketing assistance, or the generation of hard currency.“ (Promoting global trade and understanding, 2008).
Production and logistics
Production decisions are important since they need to optimize production, increase capacity usage, produce 0 defect products and generally reduce superfluous production costs. This could be made more possible by using Six Sigma techniques that are designed to cut costs, and render maximum efficiencies in the Sara lee context. This company is in process industry where control over materials, overheads and expenses, maintaining the high standards for which Sara lee are well known. SS is intended to cut defectives, stimulate production and eliminate wastes.
Again, logistics refers to the process by which the finished products are sent across to the various buyers across the country and abroad, including strategic supply chain management systems. Here again it is necessary in the Sara Lee context, to effect all round efficiencies, especially meeting consumer demands and predict delivery across the globe. All modern management tools and techniques like TQM, SS and others could be used for the enhancement of techniques that could foster efficiencies and build business across trading partners. This is more important when dealing with perishables like food products, bakeries, etc, made by Sara Lee, which have short shelf lives. It is important that packaging, transportation, storage and shipping are all well organized and managed in the Sara Lee context.
Location of production facilities
In the case of Sara Lee it is seen that it should locate manufacturing activities where economic, political, and cultural conditions, including relative factor costs, are most conducive to the performance of exports to Venezuela. It is seen that country wise, Venezuela has been a major trading partner of US, and a large supplier of petroleum products to US. By using FDI or counter trade, it is possible for Food for oil trade with Venezuela, which could be significantly good for both countries. The main impediments would be in terms of the volatile political situation in the country, with the President not enjoying the support that he once had. Moreover, he was also voiced out the Opposition who are not able to offer constructive advice on the fate of the country. It is seen that rules affecting FDI and trade can significantly affect the appropriateness of specific countries, as can threats arising from fluctuations in future exchange rate.
The question of exports is different from setting up a manufacturing unit in Venezuela. In the latter case, cost benefit analysis needs to be done including the long term benefits that could accrue to Sara Lee by setting up a production facility in that country. Environmental pollution, waste disposal and recycling and other factors concerning environment would be a major issue. Again, the attitude of local managers and executives are important, since marketing and other benefits are best handled by local persons, due to familiarity with commercial terrain.
In the event of Sara Lee setting up a food product or garment unit in Venezuela, or assisting the Venezuelan entrepreneur in setting up unit here, through technical or commercial collaboration, it is necessary that their role and area of activity be specified. If it through FDI, it is necessary that financial partnership would entail sharing future profits or revenues of the plant. It is also necessary that Sara Lee conducts feasibility studies in Venezuela regarding the commercial viability of setting up a plant in Venezuela, including SWOT analysis, and the proposed gains and benefits that could accrue to Sara Lee’s overall business prospects in Latin America. This could also signal the beginning of strong and closer ties with Venezuelan business men and entrepreneurs aimed at strengthening the economies of countries, US and Venezuela.
Make or buy decisions?
The next aspect would be with regard to whether Sara Lee needs to build production resources from within the company, or would it be better to outsource from other countries. The main benefits of outsourcing is that it is economically less costly, more productive and better results could be gained, especially in the food products like Sara Lee. In case Sara Lee wished to set up their own production units, it would be expensive and it is necessary to find out whether this would be economically feasible in the long run. In the case of make. Quality and product standards are assured, since it is tested by Sara lee’s own Quality control departments. Again, a greater degree of control and decision making could be exercised for make decisions, and strategic changes could be possible. However, buy decisions need to consider the lowered costs, greater speed and efficiencies and also better liaison with strategic partners, especially on a long term basis. However, buying decisions would be best suited when time and resource constraints are present, and it becomes necessary as vital support for Sara Lee. For instance, the ingredients for making cheese cakes, for Sara Lee are important. Making would entail setting up a separate production unit, manning it, and adding to costs and efforts. But quality and consistency of supply is assured. However, these ingredients could also be bought at lower costs with quality assured. Thus it would depend upon the type of product that needs to be bought; management policies and other consideration that could determine Make or buy decisions.
Globally dispersed production system
It is necessary to have access to information regarding worldwide production centers. As far as possible, it would be necessary to employ American employees to man them, since communication is important and a standardized approach is necessary to achieve high production and productivity. Again, it is also necessary that standard production processes need to be followed in all the centers, so that efficiencies in waste control, optimizing outputs and control over inputs are achieved. The main aspects that need to be controlled are superfluous costs, labor absenteeism and attrition, control over materials and proper inventory systems and control over overheads, scrapping wasteful and not needed costs, including employee wages and salaries, and other non productive costs.
It is seen that over the years, the concept of manufacturing and production has undergone sea changes. It is seen that Sara lee needs to consider modern production and cost cutting facilities and act accordingly, after making detailed studies. It is also necessary that JIT production needs to consider local issues, since manufacturing in Latin American countries is different than producing in the United States, in terms of work culture, language, government regulations, country specific issues and the political climate, especially in Latin American countries.
It is also necessary that joint ventures and covenants need also consider the aspect of mutual benefits in order to succeed in the international environment. It could also be seen in terms of the fact that different policies need to be taken for different countries, considering the constraints and advantages each one allows.
In the international context, it is seen that Sara Lee enjoys a good market standing, and its products are well received in many countries. Thus, it would be good if the production facilities now run in the Americas are extended to other parts of the globe, including Latin American countries.
Trade integration
Trade and investment therefore should be seen increasingly as parts of an integrated whole. Businesses are generating revenues and profits not only by exporting and importing goods and services, but also by investing abroad and/or attracting inward FDI to make their business model more competitive. (Hodgson 2004).
In the context of Sara Lee, it is seen that it is a premier food product company with diversified interests in Air purifiers, consumer goods like shoe wax and sponges, toiletries and hygienic products, garments, coffee and many other consumer products catering to a large cross segment of users. It is also seen that many of their product ranges are well received not only in the US but also in many parts of the globe including developing economies like India, China, Russia etc.
It could however be seen that most of its products are acquired though acquisitions and take ups, and are not essentially product lines that are integral to Sara Lee’s core mission and philosophy. Under such circumstances, it is necessary that Sara Lee concentrates on its core business, consolidates it in terms of global networking and then add on product lines similar to its core business, either through strategic alliances and partnerships. In the context of Venezuela, it could be said that considering the present condition in Venezuela, a food for oil tradeoff would be most suitable, considering the currency situation and the other aspects that has beset the country. The climate is favorable for trade, and given a set of favorable circumstances, it could be well within Sara Lee’s corporate objective to pursue trade with Venezuela, not only because of US strategic connections with that country, but also because this could offset trade in local US markets and be a steady outsource for American products in the region.
Again, given the fact that US Venezuelan relations are robust, it is believed that all forces positively contribute to better trade with Venezuela.
References
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Duran, Ernesto., & Cummins, Mike. (2009). Sara Lee and Clorox announce partnership in Latin America: About Sara Lee. News: Sara Lee. 2. Web.
Hodgson, Glen. (2004). Trade in evolution: The emergence of integrative trade. EDC: Export Development Canada. Web.
Mission. (2009). Export Import Bank of the United States. Web.
Promoting global trade and understanding. (2008). GOCA: Global Offset and Countertrade Association. Web.
Rodriguez, Francisco. (2008). An empty revolution: The Unfulfilled promises of Hugo Chavez. Foreign Affairs. 1. Web.
Venezuela Profile: Petroleum and other resources. (2009). US Department of State: Diplomacy in Action. Web.
What does letter of credit mean. (2009). Investopedia: Forbes Digital Company. Web.