On behalf of investigating an appropriate market for manufacturing and selling fair trade chocolate, Spain is considered to have attention of the confectionary companies. At the beginning of research, Spain seemed to be attractive because Spain was the seventh largest economy among Organisation for Economic Cooperation and Development (OECD) countries with GDP per capita of $31,831 in 2007 (Bureau of European and Eurasian Affairs, 2008). In this report, risks and opportunities of manufacturing and selling fair trade chocolate in Spain will be considered by critically analysing economic, political, legal, and socio-cultural circumstances. Entering into chocolate confectionery market in Spain will be a long-term investment. Thus, above factors should be carefully considered.
This report will commence by presenting and analysing growth in confectionery market, transparency of government and acknowledgement of fair trade products that are the key opportunities for manufacturing and selling chocolate. After analysing opportunities, risks of economic recession, unemployment, fear from terrorism, government fiscal policy and health issue will be considered afterwards. From the following research, it is recommended that at this stage of analysis, it is clear that entering into Spanish chocolate market is yet to be established. However, further research could be undertaken in the future to investigating fair trade chocolate in Spain.
Opportunities
Economic Factor
There are some economic conditions that show Spain is a potential market for our company. Firstly, there has been growth in the confectionery market in Spain, even though recession by Global Financial Crisis (GFC). Secondly, because long term view is to be considered, it shows promise that Spain economy will recover from the recession. Lastly, low interest rate might increase consumer expenditure.
1.1 Growth in Confectionery Market
There are few economical opportunities for establishing new confectionery plant in Spain. Gross Domestic Product (GDP) decreased by 3.8 per cent in 2009 (Euromonitor international, 2010) because of global economy recession in 2008 (The Economist Intelligence Unit Limited, 2009 a). However, confectionery market in Spain has been growing continuously for the period from 2004 to 2008 with a compounding growth rate at 1.8 per cent (The Economist Intelligence Unit Limited, 2009 a). One third of aggregate market revenues were generated by chocolate sales (The Economist Intelligence Unit Limited, 2009 a). Market size for chocolate confectionery increased from €739.6 mn in 2004 to €967.7 mn in 2009 (Euromonitor international, 2009 a). These statistics represent that chocolate confectionery market is not affected much by recession. Assumption that can be made from this fact is that chocolate consumption will remain the same constant growth in the future. Thus there is the advantage for selling fair trade chocolate in Spain.
Recovery from Recession in the future
Secondly, Spain is expected to recover from the recession from 2010. Therefore, consumer confidence and private consumption will increase (The Economist Intelligence Unit Limited, 2009 a). As establishing fair trade chocolate company in Spain will be a long term investment, not only should the current economic condition be considered but also the future economic condition. In the future it seems Spain will be able to recover from the recession and will once again have stabilised economy. Therefore, as a long term view, Spain is considered to be appropriate to invest fair trade chocolate company.
Low Interest Rate
Low interest rate will ease the financial situation of households in 2010, covering decrease in real disposable income resulting from high unemployment and increase in tax rate (OECD, 2009). As a result, part of fall in consumer expenditure will be covered.
Political Factor
2.1 Corruption
In Spain, acceptance or receiving a bribe is a criminal act. There are variety of laws, regulations, and penalties dealing with corruption in Spain. Penalties for corruptions and bribery are set on both civil and criminal law. Moreover, the Spain parliament passed a strict new law against tax evasion that was made to eliminate corruption. Furthermore, Spain is also a signatory of the OECD Convention on Combating Bribery. Spain endeavors for anti-corruption and it is obvious that it is not bias for or against foreign investors (PRS Group Inc, 2009).
These strict laws for corruption represents that corruption seems not to be an obstacle to invest in Spain.
Legal Factor
Spanish laws, regulations and constitution protect foreign business entering into Spanish market.
3.1 Conversion and Transfer
Spanish law allows 100 percent equity foreign investment, and completely liberalised capital movements. There are no controls on capital flows. In 1999, Spain also established free movement of capital in and out of the country by removing all forms of portfolio authorization. As a result, Spanish law prevents restrictions of capital movements between states as well as countries. The law applies to payments, receipts, and transfers generated by foreign investments in Spain. This makes easy for acquiring and transferring capital in Spain which is one of the advantages for establishing new company. (PRS Group Inc, 2009)
3.2 Right to Ownership and Establishment
The Spanish Constitution protects private ownership. Private ownership rights are clearly established in Spanish law, and same legal treatment is applied to foreign firms. Moreover, there is no discrimination against public or private firms with respect to local access to markets, credit, licenses and supplies. (PRS Group Inc, 2009)
Socio-cultural Factor
4.1 Household Budget on food
The Spanish households devote most of their budget in foods. Compare to other countries in Europe it is third highest. Average of household's food budget are used for 25 percent on meat, 25 percent on fruit and vegetables, 12.9 percent on dairy products, and 2.2 percent on sugar confectionery of their food budget went for sugar confectionery. The budget levels went up because of the price increase. Average growth for consumer expenditure on confectionery increased slightly from 1995, even though price for main food has increased. (Euromonitor International, 2009c)
4.2 Fair Trade
According to the statistics in the first Fair Trade Year Book published in Spain, in the year 2003 the total sales of fair trade products was 10 662 210 euros. This statistic meant an increase of 19 percent from 8 975 817 euros in the year 2002. In 2001, the total volume of sales of fair trade products in Spain represented 7 220 000 euros which is 1.9 percent of total volume of fair trade in Europe. Among the fair trade products, food sales reached 5 256 720 euros. Coffee represented 21.2 percent of total sales, drinking chocolate 11.1 percent and sugar 5.4 percent (Goig, 2007).
Spanish consumers are well aware of fair trade products. 35.9 percent of the Spanish population is aware of fair trade as a consumer alternative and 16.1 percent sometimes purchase fair trade products (Goig, 2007). Therefore, selling fair trade chocolate has great advantage than normal chocolate.
Risks
Economic Factor
1.1 Recession
First of all, decline in world economy affected Spain more than any other EU countries in 2009 (Euromonitor international, 2009 b). Even though most of European Union countries are recovering from the recession, economy of Spain decreased (The economist, 2009 a). Real GDP growth was 0.6per cent in 2008 and -3.6 per cent in 2009 (Euromonitor international, 2009 b). It is also predicted to decline until 2011 (Euromonitor international, 2010).
1.2 Unemployment
In addition, unemployment in Spain reached the second highest in the European Union with 18.1 per cent in 2009 and it is predicted that the unemployment level to reach 20.5% by European Commission (Euromonitor international, 2010). Unemployed consumer is going to have difficulties in financing, leading to downgrade in lifestyles (Euromonitor international, 2010). Thus decrease spending in non essential categories especially in chocolate confectionery (Euromonitor international, 2009 a).
1.3 Private Consumption
Thirdly, 5.1 per cent decrease in private consumption is measured in 2009 and it is forecasted to fall 1.1 per cent in 2010. Consumer expenditure on sugar and confectionery decreased from €2524.9 mn to €2311.1mn (Euromonitor international, 2009 a). Even though Spain economy seems to recover from 2010, Spain is going to recover extremely slowly (OECD, 2009).
1.4 Cost of doing business
Furthermore, cost of doing business in Spain is very high because of low productivity, inflexibility of labour market and low levels of research and innovation. It is really difficult to hire and fire employees in Spain than other European Union countries (Euromonitor international, 2007). Flexibility of determining labour, rigidity of employment and hiring and firing practice is ranked 115, 116, and 122 among 133 countries in global competitiveness report 2009-2010 (Schwap, K. 2009). Total tax rate in Spain is ranked 109 with around half of the profit and time required to start a business is 47days (Euromonitor international, 2010) ranked 108 (Schwap, K. 2009). Governments will keep tax rate high to cover budget deficit of 10% of GDP and to make it down to 3% in 2013 (Oxford economics, 2010). Therefore it is difficult to build up chocolate manufacturing company in Spain.
1.5 Supply Market
Conditions of supply market for chocolate confectionery seem to be negative. Cadbury Plc, Nestle S.A, and Mars Inc holds 43.1% of the total chocolate confectionery market value (The Economist Intelligence Unit Limited, 2009 a). Various and differentiated products are produced in the market. Manufacturer has low power for the price of input, sugar and cocoa products, because they are sold in commodity market. To begin business in this market, it highly relies on economic growth and size of existing company (The Economist Intelligence Unit Limited, 2009 a). These existing companies seek to produce new product lines with low price to attract consumers (Euromonitor international, 2009 a). It seems it will be difficult to persuade retailers to include new product from new business (The Economist Intelligence Unit Limited, 2009 a).
Political Factor
Terrorism
Serious terrorist bombings occurred on railway system in Spain in 2004. 200 people were killed and 500 were injured from the terror. This was the worst terrorist attack recorded in Spanish history. The bombing had been the work of Euzkadi Ta Azktasuna Basque (ETA); Basque separatism organization historically committed many terrorist acts (Country Watch In., 2010). The ETA also attacked Madrid's Barajas Airport in December 2006 (The Economic Intelligence Unit Limited, 2009 c). Threats from both Islamist and Basque terrorism remain in Spain. Terrorism could be risk for the business as Spain is not safe from terrorism (Country Watch In., 2010).
2.2 Fiscal Policy
Spain is worried about fears of 'Greekstyle' debt crisis which is collapse of government because of high budget deficit (Barnetson, 2010). To reduce large government budget deficit, Spain Prime Minister Jose Luis Rodriguez Zapatero announced 'austerity package' (Minder, 2010). Austerity package includes public-sector pay cut, pension payment freeze, and more tax on higher income (The Economist Intelligent Unit, 2010). This plan could reduce government budget deficit, however, it might have negative impact on economic activity (The Economist, 2009 b). This austerity package will reduce spending from consumer especially on non-essential product, fair trade chocolate. Therefore, new government fiscal policy might be a risk for the business.
Legal Factor
Taxation
Tax regime in Spain will rank poorly because of high tax rate (The Economist Intelligent Unit Limited, 2009 c). The Spanish government is implementing new series of tax increases in 2010. Firstly, the standard value-added tax (VAT) rate will be increased from 16 percent to 18 percent. In addition, tax rate on capital income will also be divided into two brackets. Tax rate of 19 percent will be taxed to capital income up to 6,000€. Above this level would be taxed at a rate of 21 percent. Moreover, tax rebate introduced in 2008 to encourage consumption will be abolished in 2010 (The Economist Intelligent Unit Limited, 2009 b). These series of new taxation systems will cause decrease in consumption.
Socio-Cultural Factor
4.1 Health
In recent, significant health issue has arose in Spain. The Spanish enjoy their food by having five meals a day, including three main meals and two snacks. For the breakfast, they normally it cakes and coffee (hot chocolate for children). Lunch could be anything from just a snack to a proper meal. Spanish enjoy sandwich, biscuit and chocolate as a snack (Euromonitor International, 2009c).
Traditionally, Spanish women took the time for proper meal. Rise in women workforce caused increase in consumption of frozen food and packaged food. Many Spanish women in the work place prefers less time consuming food such as frozen chips or hamburgers (Euromonitor International, 2009 d). However, this caused an increase of overweight children and health problems. Two third of children eat snacks every day. Eating chocolates and biscuits as a snack also resulted in overweight for children. Heavy meals with ready-made meals and high fat and sugar foods have resulted 40 percent of population being overweight. The children especially, are suffering from obesity, as they are the ones who eat the most biscuits, sweets and quick meals. Many Spanish children actually have a breakfast composed of biscuits, pastries and chocolate milk. Overweight Spanish population is higher than ever before (Euromonitor International, 2009c).
The fast and easy-to-cook food trend reached Spain, and is a significant reason for obesity. Healthy food and organic food was not as popular as other countries. However, in recent, fresh food and healthy food consumption by health conscious consumers has increased (Euromonitor International, 2009c).
As Spain is becoming increasingly aware of health issues that could lead from eating unhealthy food, for example, diabetes and obesity, Spanish are consuming healthy and non-sugar products rather than oily products. With obesity threatening the general health levels in Spain, more and more people are turning to health foods (Euromonitor International, 2009c). This will result in a decrease in chocolate consumption. Moreover, health issue will last for long time. Thus, investing new fair trade chocolate business in Spain seems risky.
4.2 Ageing
In Spain, birthrate is lower than other Europe countries. Population ageing is another risk for chocolate business. Population ageing affects food product business. In 2050, Spanish population over 65 will be a third of total population. Expected life for women is 83.8 years which is the highest in Europe. For men, it is 77.2 years. Life expectancy keeps rising in Spain. Spain will be one of the oldest population countries in the world. Many businesses in Spain are targeting elders by producing healthy products (Euromonitor International, 2009 d). However, main consumer for chocolate is not the older generation. Population ageing in Spain is risk for chocolate market, as chocolate is a sugar product which can be seen as unhealthy product. If entering into Spain confectionery market, sugar-free chocolate such as dark chocolate should be produced.
Conclusion and recommendation
While examining Spain's economical, political, legal and socio-cultural factors, Spain seems to have more risky factors than opportunities. From the economic factors, confectionery market has increased and Spain is recovering from the recession. However, growth in confectionery market is modest, and it seems confectionery market will remain at a constant level because of health issue in Spain. Moreover, low interest rate is a short-term figure, thus, it will not affect much for our investment which is for a long-term. Economic performance of Spain seems to decline until 2011 because of high unemployment, budget deficit and tax rate. Consumer demand and consumer confident will decrease because of fall in real disposable income. As a result of projected increase in low interest rate in 2011, recovery from recession will slow down and household income will decrease (OECD, 2009).
In political factors, threat from terrorism and government austerity fiscal policy seems more related than transparency of the government. Without guarantee of safety, it would be difficult to operate in Spain. Moreover, fiscal policy reduces consumption and increase cost for the firm which directly affect selling and manufacturing. For the legal factor, it seems like an opportunity because Spain laws protect businesses in operating and attitudes toward foreign capital investment seems to be positive.
Consumer eating habits are moving to healthy food because of increase in diabetes and obesity. Acknowledgement of fair trade has increased; however, fair trade does not mean healthy products. Therefore, as chocolate is a sugar product which causes diabetes and obesity, chocolate consumption will fall.
In conclusion, economical, political, legal and socio-cultural factors both include opportunistic and risky features. However, only legal features seem to be weighted as an opportunity for manufacturing, since others are weighted as risks for both selling and manufacturing. Therefore, from the research, Spain does not seem to have suitable condition for the business. However, further research can be made in the future.
