Nova Energy Drinks company is an innovative solution in the beverage industry, offering a healthy alternative to a conventional energy drink. Excelled both in sales and social performance, Nova Energy Drinks is ready to distribute its product past the US territory, looking for long-term investments. This case-study assesses the risk of extending business realms to two areas in South America: Argentina and Venezuela. Taken into consideration the analyzed demographics, cultural and legal barriers, as well as effects of currency, the option of penetrating the foreign markets should be carefully reconsidered.
Demographic
Argentina
Though located in South America and deeply embedded in the continent’s traditions, Argentina differs from most of the neighboring states. An index of 49/100 in the power distance category points at the residents’ lack of desire and readiness to accept hierarchy, suppressing own interests in the frames of social inequality (Hofstede Insights, 2020a). When it comes to individualism, Argentina scores 46/100, remaining the most individualistic country in the South America (Hofstede Insights, 2020a). While standing on the middle of the individualism spectrum, Argentines still exhibit few collectivistic qualities, such as an obligation to follow family traditions or get approval from the social circle.
In the masculinity dimension, Argentina shows the prevalence of Masculine elements over Feminine. In reality, the score of 56 translates to assertiveness, strong ego needs, and achievement orientation over relationships (Hofstede Insights, 2020a). Talking about uncertainty avoidance, Argentines score particularly high – 86/100 which means their strong need for strictly defined legal systems and sets of laws to live a structured life (Hofstede Insights, 2020a). In terms of long-term orientation, Argentina holds an index of 20, establishing itself as a normative society where the absolute truth is prevalent and traditions are deeply respected (Hofstede Insights, 2020a). Argentines don’t save much money for the future and frequently fall for immediate gratifications. This finding comes consistent with an indulgence index of 62 (Hofstede Insights, 2020a), as Argentines like spending money for their hobbies and act on impulses.
Venezuela
Unlike Argentina, Venezuela scores high in power distance, tending to accept social hierarchies easily, considering them to be a part of their everyday life. With an index of 81/100, the power tends to be concentrated in the hands of few public officials, leaving many people feeling helpless (Hofstede Insights, 2020b). With a score of 12, Venezuela tops the list of collectivistic cultures in the world. It is important for Venezuelans to belong to a group and align with their opinion (Hofstede Insights, 2020b). Relationships are often valued more than results, and compromises are especially valid in the working environment. An index of 73 in the masculinity field means that the residents of the country are driven by success, competition, and status (Hofstede Insights, 2020b). Interestingly, they do not compete with individuals in their social group, projecting the rivalry toward other groups.
Similarly to Argentina, Venezuela scores high on the spectrum of uncertainty avoidance. Venezuelans seek mechanisms to express themselves openly, either in terms of rules or emotions to avoid ambiguity (Hofstede Insights, 2020b). Following the demographics description of Argentina, the score of 16 indicates that Venezuelan society is highly normative in thinking. Finally, when it comes to indulgence, Venezuela heads the ranking with an absolute highest number of 100 (Hofstede Insights, 2020b). People living in this country often act on their impulses, enjoying life to the fullest and spending much expenditures on leisure time.
Barriers
Cultural
Not a lot of cultural barriers can stand on the way of Nova Energy Drink’s entering the market. One prevalent, though, is collectivist culture in Argentina and Venezuela. The practice of drinking energy drinks is commonly frowned upon by the older generation. Thus, with the need to belong and receive approval from their social circle, many potential customers in the targeted market can avoid making a purchase despite their tendency for immediate gratification.
Legal
Though there are not many cultural barriers to enter the foreign market of Argentina and Venezuela, there are much more legal constraints. It is very complicated to get a permit for electricity supply in Argentina which may slow down the production and distribution. Registering property in the country is a complex, multistep process consisting of 7 procedures and lasting about 55 days (Argentina Investment & Trade, 2016). The average in the neighboring states is 26, almost twice less. Before the actual registration can even begin, the owners have to obtain dominio, a certificate of ownership, and inhibiciones, a certificate of good standing (Argentina Investment & Trade, 2016). Another legal restraint is paying taxes: foreign investors have to make 9 payments a year. High taxing rates and confusing system may worsen the working conditions (Argentina Investment & Trade, 2016). Additional legal barriers may come from the Venezuelan side, influencing the quality of Nova Energy Drinks distribution (“Top 10 challenges of doing business in Venezuela,” 2020). Export-import trade agreements are surprisingly slow: it takes up to 50 days to export and 70 to import (“Challenges of doing business in Venezuela,” 2020). Another restraint is getting entrepreneurial loan in Venezuela: corrupt financial transactions and bureaucratic measures make it hard to obtain credit.
Effects of Currency
Argentina
In terms of currency, it is quite risky to penetrate the energy drink market in Argentina. Since 2011, the state government announced tight currency controls which led to the large drop in the commodity prices and decreased trade revenue (“Argentina imposes currency controls to support economy, “2019). One of the long-lasting effects of such intervention is floating exchange rate. The Argentinian national currency devalued by 30% over the course of one year: in 2017, 1 USD = 17.40 Argentinian pesos while, in 2018, the rate rose to 1 USD = 38 Argentinian pesos. By 2019, the Argentinian currency experienced even a bigger decline – 54% – against the USD dollar (“Argentina imposes currency controls, “2019). Such devaluation might carry potential risks for the investors of Nova Energy Drink who can bring capital in a country which no longer has reserves of its own currency.
The worth of Venezuelan currency, bolivar, is even more devalued than Argentinian pesos: per 2019, 1 USD = 636,771.03 Venezuelan bolivars (Caracas, 2019). The hyperinflation in the country already had adverse effects on the market, slowing down export-import relationships (Caracas, 2019). The current situation can be particularly dangerous for the Nova Energy Drink as customers won’t be able to make even a small purchase without having foreign currency. Therefore, one key positive factor uniting the two countries is cheap cost of business maintenance. Negative factors are much broader: lack of social responsibility, potential exploitation of labor, devaluation of currency, and others. When hiring local distributors, Nova Energy Drink might go against its current business model of social responsibility, using cheap labor from the developing countries to achieve its objectives. Consequently, this analysis provides a solid ground for reconsideration of the target demographic.
In comparison to the US, doing business in Argentina and Venezuela is much cheaper. For example, the minimum wage in the US is 7 USD per hour, while in Argentina it is 2.8 USD per hour (International Labour Organization, 2020). Venezuelan minimum wages are particularly depressing: more than half of the residents of the country receive 2 USD per month. The cost of utilities costs less on both territories; moreover, electricity, heating, and water supply is less regulated than in the US. However, it is important to note that multiple types of taxes can bring the cost of business maintenance in Argentina and Venezuela down, causing additional expenditures.
Social Responsibility
Nova Energy Drinks company thrives to lead the business with the utmost integrity and ethics, based on the framework of the triple bottom line. The organization plans to enter the Argentinian and Venezuelan market not only with the sole goal of making profit but also with the objective of caring about the people and planet. In its production, Nova Energy Drinks follows the guidelines of sustainable production, reducing carbon footprint and greenhouse gas emissions. All products are clinically tested, and dosages are carefully checked by the professionals weekly (Camilleri, 2017). No animal testing is permitted to approve the new energy drinks with respect to the animal rights (Camilleri, 2017). The company makes sure to inform the customer of the potential risks associated with the consumption of the product.
Nova Energy Drinks tries to improve the life of the communities where it operates by improving access to clean water, better education, and healthcare. All employees hired by the organization receive a full package of social benefits and a competitive salary, twice higher than a minimum wage in the respective territories (Camilleri, 2017). In the given scenario, the “bottom of the pyramid” demographic is members of the low class who are currently unemployed or receive minimum wage. Though these people might not constitute a targeted audience of the product, they will be welcomed to entry the social responsibility model as potential employees of the company.
Management Infrastructure Requirements
Not many management infrastructure requirements are publicly identified for the potential investors. From the Argentinian side, Nova Energy Drinks will go through the IDB’s Flexible Guarantee instrument. It is a policy issued to foreign investors and financiers signifying their public commitment to rely on the state’s competitive advantage while doing business (Argentina Investment & Trade, 2016). Unfortunately, Venezuelan market does not have precise guidelines, informing the investors about the management infrastructure requirements. More in-depth research in foreign language will be needed in the future if Nova Energy Drinks company decides to distribute their products in the Venezuelan market.
Conclusion
Nova Energy Drinks company explores new potential opportunities of moving to an international arena, penetrating two foreign markets in South America: Argentina and Venezuela. The demographic of the customers is as follows: mostly collectivistic, mostly masculine, highly indulgent, and highly uncertainty avoidant. One big difference between the two targeted audiences is that Argentinian society is more egalitarian and less likely to accept substantial social gaps. Some of the barriers to enter the market include collectivistic nature, high taxes, credit issues, poor access to electricity, and prolong period of obtaining property registration. Talking about finances, Argentinian peso experiences significant devaluation, resulting in fluctuating exchange rates. At the same time, Venezuelian bolivar went through massive hyperinflation, no longer circulating on the foreign trade market. The company plans to proceed with the social responsibility model, caring about three aspects simultaneously: people, profit, and planet. Further research is required to identify potential infrastructure management requirements.
References
Argentina imposes currency controls to support economy. (2019).
Argentina Investment & Trade. (2016). Doing business in Argentina.
Camilleri, M.A. (2017). Corporate sustainability and responsibility: Creating value for business, society and the environment. AJSSR, 2, pp. 59–74.
Caracas, H. P. (2019). Venezuelan minimum wage hits rock bottom: $2.00 a month. Web.
Hofstede Insights. (2020). Argentina.
Hofstede Insights. (2020). Venezuela.
International Labour Organization. (2020). Statistics on wages.
Top 10 challenges of doing business in Venezuela. (2020). Web.