Business Report - Himalayan Java - Coffee Export Potential - revised PDF

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MAY 25, 2019

BUSINESS REPORT: EXPORT POTENTIAL HIMALAYAN JAVA PRIVATE LIMITED

BIKASH LAMICHHANE GURUNG, 18509 CHIRANJEEVI POKHREL, 18517 PRADHUMNA KC, 18510 SHULAV SHRESTHA, 18526 GAURAV RAJ SHRESTHA, 18524

Acknowledgement Foremost, we would like to extend our heartiest gratitude to our faculty, Mr. Binayak Malla, for giving us this opportunity to conduct this study. This project has not only helped us understand the concepts of the course better, rather has also helped us understand the intricacies of the Nepalese Coffee industry and gain insight on the current scenario and future prospect of the sector in Nepal. This project also provided us an opportunity to interact with charismatic and imminent entrepreneur of Nepal like Mr. Gagan Pradhan and appreciate his zest of dedication and nationalism through a sincere effort of his coffee venture. We would also like to thank Mr. Gagan Pradhan, Co-Founder of Himalayan Java for taking the time and effort to interact with us and address our questions in relation to this project despite his busy schedule. We are grateful for the knowledge and information he shared with us regarding the journey of Himalayan Java, the overall coffee sector in Nepal and the future plans of Himalayan Java. Lastly, our sincere appreciation to our colleagues and every member who have played an instrumental role in assisting us to complete our project.

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Table of Contents Acknowledgement .......................................................................................................................... 1 Executive Summary ........................................................................................................................ 3 Purpose and Objective .................................................................................................................... 4 Methodology ................................................................................................................................... 4 Introduction to Himalayan Java ...................................................................................................... 5 Service Profile ............................................................................................................................. 5 Product Profile ............................................................................................................................ 5 Market ......................................................................................................................................... 6 Identification of Potential Export Market ....................................................................................... 7 Quantitative Analysis .................................................................................................................. 7 Qualitative Analysis .................................................................................................................... 8 Export Market Analysis ................................................................................................................ 10 US Economy at a Glance .......................................................................................................... 10 Ease of Doing Business ............................................................................................................ 10 US Coffee Market ..................................................................................................................... 11 PESTEL Analysis ..................................................................................................................... 13 Political Environment ........................................................................................................... 13 Economic Environment ........................................................................................................ 13 Social Environment............................................................................................................... 13 Technological Environment .................................................................................................. 14 Legal Environment................................................................................................................ 14 Cultural Dimension ................................................................................................................... 15 Internationalization Strategy ......................................................................................................... 16 Mode of Entry ........................................................................................................................... 16 Business Level Strategy ............................................................................................................ 17 Corporate Level Strategy .......................................................................................................... 17 Organizational Structure ........................................................................................................... 18 Reference ...................................................................................................................................... 19 Exhibit I: Transcript of Interview ................................................................................................. 20 Exhibit II: Comparative PESTEL Analysis .................................................................................. 24 Exhibit III: Comparative Hofstede Analysis................................................................................. 27 Exhibit IV: Comparative Ease of Doing Business Ranking ......................................................... 28

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Executive Summary This analysis was conducted with an objective of identifying a potential market for export of Arabica Roasted coffees being manufactured by Himalayan Java Private Limited in the near future. Our analysis involved discussion with the Company regarding their assessment of a potential market and conducting further analysis in identifying the potential market for the Company. We have also conducted an extensive analysis of the identified export market to describe the suitability for the product. Based on our analysis, the United States of America was identified to be the most potential export market for Himalayan Java. This was derived after a comparison of a number of qualitative factors between 4 countries identified during the analysis. We could also note that the USA had a stable political environment and a strong economy which could support the entry of Himalayan Java into the market. Similarly, certain cultural traits like Uncertainty Avoidance and Short Term Orientation could be a vital cultural match for a Nepali Company to enter into the US. The above, coupled with a high ease of doing business makes the United States a good potential for Himalayan Java provided it already has presence there through its franchise stores. As part of its internationalization strategy, we suggested the Company should continue with its franchising model in the US to leverage on its existing franchising goodwill to promote its coffee products and boost retail sale in the market. We are of the opinion that a hybrid strategy could afford a good competitive advantage to the Company all the while strategizing to expand its franchise stores across different locations in the US to develop the US market for its retail coffee business.

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Purpose and Objective This report is being prepared as part of our project undertaken as a mandatory requirement for our course “International Business Management”. The objective of this project is to identify a domestic company related to coffee sector in Nepal, which is engaged in overseas export of coffee or intends to export its product overseas in near future; and conduct an analysis to identify the potential export market for the subject company. For the purpose of this study, we have identified Himalayan Java Private Limited (hereinafter referred to as “Himalayan Java” or “the Company” or “Subject Company”) as our subject company and conduct analyses to identify potential export market for coffee products for the Company.

Methodology During the course of our preliminary interview, we noted that the Company had identified two economic regions as their potential market for export of their coffee products. For the purpose of this report, we have employed a set of quantitative and qualitative analysis to identify the most potential export country in the selected region (Details described in Section: Identification of Potential Market). Upon identification of the most potential market, extensive analysis of the potential market were conducted using various market analysis tools provided by the International Trade Centre (“ITC”) and other analyses like the PESTEL analysis and Hofstede Cultural Dimension theory have been presented for the export market. Finally, the report also discusses the most appropriate mode of entry into the market.

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Introduction to Himalayan Java Himalayan Java was co-founded on November 29, 1999 by Mr. Gagan Pradhan and Mr. Anand Gurung with an objective of providing a world class coffee experience to customers in Nepal. With an aim to establish the authenticity of Nepali products and brands both nationally and internationally, the Company started serving pure Nepali coffee from its only store in Thamel, Kathmandu in 1999 and has ever since, expanded to over 30 locations across Nepal and internationally. It is a member of the Coffee Association of America and approved by the Food and Drug Authority (“FDA”) of the United States of America.

Service Profile The core business model of the Company was to operate coffee café and serve the best quality Nepali coffee and coffee experience locally and internationally. The Company gradually adopted a franchise model to allow setting up of franchise stores both locally and internationally. Currently, the Company has over 20 stores locally across Nepal, 3 franchise stores in the United States of America and 1 store in Toronto, Canada.

Product Profile While this never was a core concentration of the Company, in order to achieve a consistency in quality of the coffee beans that were served in its stores, the Company believed it was necessary for it to produce its own coffee beans. Therefore, the Company stepped into roasting and packaging of coffee beans sourced by it from local farmers in Nepal for consumption across its locations. The Company is primarily engaged in roasting and packaging of Arabica variants of coffee in Nepal which are consumed internally and available for sale at Himalayan Java outlets only under the brand name of “Himalayan Java”.

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Subsequently, around 2016, the Company stepped into coffee farming and set up its first farm in Fikkal, Illam to produce Typica, Cattura and Bourbon varieties of Arabica coffee. The HS6 code relevant for the product of the Company would be “090121 Roasted coffee (excluding decaffeinated)”

Market The Company is not directly engaged in marketing and selling of coffee, rather consumes them across its stores. Therefore, while there are direct sales from its locations, it does not have any direct market for coffee sale in Nepal or globally. With its recent foray in coffee farming and growing roasting and packaging capacity, the Company can have excess production in the future and is well positioned to sell its coffee products in retail in Nepal as well as in other export markets.

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Identification of Potential Export Market During the course of the interview with Mr. Gagan Pradhan, co-found of Himalayan Java, he mentioned that the Company was targeting the North American and European region for export of their coffee productions in the near future. (Detailed transcription of the interview is enclosed as Exhibit I of this report.) His idea was more from the point of view of existing footprint and experience in the North American and European market. We have used this information as the first piece in order to identify the most potential market for the Company. Based on this, we have conducted the following quantitative and qualitative analysis to identify the most potential market for the Company.

Quantitative Analysis The Quantitative analysis involved sorting the various markets in the North American and European region based on a number of a criteria. In this exercise, the criteria were run in different steps independently initially on the countries in the North American and Europe region. For the purpose of this analysis, we have utilized the data obtained for countries importing coffee in these regions regarding trading of Roasted Arabica coffee (excl. decaffeinated) from the Trade Map service of the ITC Market Analysis service for a data period of 2014 to 2018 (“Review Period”). The criteria that were applied and the results of the analysis are presented below: Description Total number of countries importing Roasted Arabica coffee (excl. decaffeinated) [HS6 code: 090121] Step 1: First Criteria Elimination of Remove countries from the region which had a net Export of Arabica roasted coffee during the review period

Europe 57 9

North Remaining America Countries 24 81 4

68

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Description Net Import = Total Import – Total Export Step 2: Second Criteria Selection of countries from the remaining list that fall in top 20% region in terms of Net Import of Roasted Arabica Coffee Step 3: Third Criteria Elimination of countries from the remaining list that impose a high tariff on the import of Roasted Arabica Coffee

Europe

North Remaining America Countries

11

5

16

2

2

12

Amongst the final 12 countries that were filtered from the total list of 81 countries in the two regions, as a final step we selected the top 4 countries that imported Roasted Arabica coffee [HS6 code: 090121] at the highest prices. Based on this analysis, we zeroed down the following potential markets for exporting Arabica roasted coffee: a. The United States of America b. The United Kingdom c. Canada d. France Detailed workings are not included in this report for the sake of brevity.

Qualitative Analysis The four countries selected as a result of the Quantitative Analysis were further compared for their political and economic environment and cultural dimension and the most suitable country from the analysis. A comparative PESTEL analysis, Hofstede Cultural Dimension analysis and Ease of Doing Business comparison is presented as Exhibit II, Exhibit III and Exhibit IV of this Report.

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From an Ease of Doing Business Perspective, the USA was noted to have the highest rank among the four countries. Similarly, from the PESTEL analysis, we could note that while all the countries were politically stable, the USA had the largest economy of all the four countries with a comparably higher growth rate. The urban population concentration was higher with lower unemployment rate and acceptance of technology and legal background for protection of brand like Himalayan Java was favorable in the USA. Culturally, the Hofstede theory showed very less comparability of the countries with Nepal, however, lower power distance in the USA, higher Indulgence and comparable uncertainty avoidance level with Himalayan Java could provide a better cultural match for the Company to operate in. Hence, based on the analyses conducted in this Section, the United States of America was identified as the most potential market for export of coffee for Himalayan Java.

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Export Market Analysis This section discusses the lucrativeness of the United States of America as a potential export market for export of Arabica roasted coffee manufactured by Himalayan Java in the near future.

US Economy at a Glance The United States of America is the world’s largest economy by nominal GDP and the largest economy by Purchase Power Parity. It has a population of over 327 million and is the fourth largest country by land mass and third most populous country in the world. The US economy is a vibrant economy having a GDP of USD 20 Trillion as at 2018 which is expected to grow at a rate of 3.2% in 2019. It is an import intensive country having a current account deficit of $134.4 Bn in 2018 and a trade deficit of $50 Bn as at the end of March 2019.

Ease of Doing Business The United States of America is ranked 8th among 190 countries in the ease of doing business and has been able to consistently remain in the top 10 position in the past 10 years.

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US Coffee Market 1

Coffee is the most preferred hot beverage in the USA with over 83% of American adults drinking

coffee. Coffee accounts for 38% of total non-alcoholic beverage in the USA. Coffee consumption grew at a steady rate of 7.9% during 2015. The retail coffee market was valued at USD 12.8 Billion in 2015. The United States is the largest consumer and the second largest importer of coffee in North America. In 2015, the United States imported about 30% of its coffee from Brazil, 21% from Colombia and 13% from Vietnam. Arabica coffee is very popular in the American market with roast and ground coffee take the largest sales share, with about 36%. The country is expected to consume around 24 million bags of coffee by 2020. Some of the major players in the market are as follows:



The Folgers Coffee Co.,



Kraft Foods,



Starbucks Coffee Co.,



Private Label and



J.M. Smucker

The ITC Trade Map Analysis shows that the United States of America imported 81,839 tons of Arabica Roasted Coffee during 2018 which has increased by 19,981 tons during the review period between 2014 and 2018 at an average growth rate of 8% during the 4 years. This amounted to 8.4% of the total Arabica coffee import globally at an average purchase price of USD 10,710 per

1

https://www.mordorintelligence.com/industry-reports/united-states-coffee-market

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tons. The total value of coffee import into the United States in the year was worth $876 thousand dollars in 2018 alone.

The Market Access Map analysis also shows that the USA provides an MFN status for Arabica coffee imported from Nepal whereby there is no tariff applied on import of Arabica roasted coffee from Nepal.

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PESTEL Analysis Political Environment The United States of America has a very sound political environment with a very stable government at the helm of the country and an effective rule of law ensuring laws and strategy of government are implemented and the anticipated results are attained. Moreover, the US government has been engaging in “America First” campaign, trade wars, rising tariffs and are seem to be restrictive to imports gradually, which could poise challenge over a long run to coffee export to USA business. However, the trade adversaries are a targeted and can be expected to not have any adverse impact for Nepal. Further, the United States accords an MFN status to Nepal where the Tariff Bearers to Trade for Nepal are comparatively less. Likewise, the Food and Drug Administration (“FDA”) is a very stringent administration that governs all food and beverage items being dealt with in the US; which requires companies offering their goods and services in the US to adhere to strict regulations and compliance and a stringent inspection.

Economic Environment The United States of America is the second largest import of Arabica coffee in the North America with over 36% of their total coffee imports being Roasted...