How to Manage International Expansion

You can’t run foreign plants from Springdale or Buffalo, but you can put in place the proper local infrastructure to increase the chances of success.

By David Feder, Contributing Editor

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Going global is a given. As overseas economies move toward creating a universal middle class with increased individual spending power, food and beverage makers recognize vast untapped demographics of consumers.

 

Note to the CEO
James Rice, vice president and country manager-China for Tyson Foods Inc., has recommendations for companies moving into China, or anywhere outside of the U.S. for that matter. 
Be ready to adjust your business model, both culturally and structurally, for the market you’re going into. You cannot copy and paste the American business model to another culture or country; U.S. companies that do this always fail.
Review your business model every year. Don’t come in with the attitude, “It’s the American way or the wrong way.”
 Low cost means you have to enter a market with a value proposition relevant to the local consumer. Outside the U.S., this is generally low margin-high volume.
You must hire a local team to run the local operation. You cannot run an overseas business by remote control.
For the Chinese market, there are three key factors: speed, flexibility and low cost. These are strengths of the Chinese companies which you will compete with, and is something American companies still are not naturally good at.

This is especially important when considering the tighter purse strings of the middle-class consumer here at home. But before going overseas, anyone planning to build, manage or link up to an international operation has to lay the groundwork or risk all.

“It starts with having the right people on the ground, those who really understand the marketplace,” says Kevin Malchoff, president of the international business group for Rich Products Corp., Buffalo, N.Y. “That will ensure you have an accurate understanding of the unique cultural aspects of the country you are attempting to do business in, and ultimately will resonate with the customers with whom you’re attempting to build a relationship.”

That said, Malchoff also points out there are certain values that are universal across cultural barriers. “All of our customers across the globe are highly focused on product quality and safety,” he says. “While laws and regulations may differ from country to country, demonstrating your ability as a company to produce high quality, safe products, in a safe process are the table stakes of doing business anywhere in the world.“

The standards Rich’s sets for itself in the U.S. are the same standards it follows everywhere else. The company’s motto on the subject is, “Do what’s right no matter what.” Based on that, Rich’s doesn’t compromise safety or quality, even if the standards are lower in the host country.

Another critical aspect to consider when planning international expansion is logistics, especially for food companies with refrigerated or frozen products. “The distribution infrastructure in developing countries just aren’t as advanced as they are in North America, and it can be a challenge to find a reliable cold-chain transportation and warehousing network to meet your needs,” Malchoff says.

To solve this problem in China, Rich’s established a joint venture relationship with a local cold chain logistics company, KX Logistics. “The partnership we developed with KX provided us with much greater distribution access in China and confidence our products will be warehoused and delivered in a quality-preserving and safe manner,” explains Malchoff. “It’s been a key driver in the accelerated growth we’ve experienced in China.”

Rich’s has built an international manufacturing network that includes locations in Brazil, Canada, Mexico, China, South Africa, Thailand, India and the U.K. And this month, the company will be celebrating the grand opening of a state-of-the-art non-dairy topping and icing facility in Vietnam.

Because of its global plant experience, Rich’s is forming a consulting service to help other companies looking into setting up operations in foreign countries, with a focus on China. “We’ve been doing business internationally for more than a quarter century, so we’ve dealt with many of the challenges companies new to international business expansion may encounter,” Malchoff continues. “We think we can leverage our global expertise to help guide other companies as they begin to expand beyond their borders.”

Avoiding cereal killers

Establishing a global operation can happen without leaving North America. While most persons thinking of a foreign plant focus on Asia, it’s easy to forget the two major markets in our back — and front — yards: Mexico and Canada.

One of the most recent expansions for U.K.-based Weetabix Co. was into Canada. The ready-to-eat cereal giant had long “gone global” when it took over cereal, bar and cookie-maker Barbara’s Bakery, Petaluma, Calif. Its expansion to the U.K.’s “other colony,” Canada, posed its own challenges.

“While certainly Canada has a culture much like the U.S., it also has its own consumer complexities to consider,” says Kent Spalding, vice president of marketing of Weetabix North America/Barbara’s Bakery. “We worked to understand the taste preferences — especially flavor profiles — that are most popular.”

The company then looked at both competitive and out-of-category offerings to determine trends that appeared to be emerging. Ideally, Spalding explained, a company should seek a trend or functionality it already is well positioned to compete with through both its intellectual and process capabilities.

“We look to expand brands that translate well emotionally, with benefits the consumer can Identify with,” he says.

Among the most difficult aspects of expanding internationally are understanding the regulatory differences and what is appropriate to say and claim on the package, according to Spalding. “Add translations to the mix,” he says, “and the complexities become a real challenge. We apply a very rigorous process, including both redundant legal and translation support. Imagine going into a country with language requirements and no one speaks the language in your company!

“Post-9/11, the border also can become quite a challenge,” Spalding continues. “Making sure appropriate declarations are made and all paperwork has been processed and vetted prior to crossings is critical.” He notes it can be a real benefit to seek help from outside agencies specializing in international transportation.

Distribution is always a challenge, Spalding points out. “Distributors are the conduit to your consumer and you must be on the shelf or it is all for naught. Pre-sell your way into new markets prior to setting it all up. Make sure once your products hit the marketplace they have a home. It's a good idea to have multiple customer trade lined up but,” he cautions, “nothing is sure until the ink is dry.”

The importance of well-constructed distribution channels is seconded by Jeff McLemore, product manager for Sunsweet Growers Inc. The majority of the company’s products still are processed and packed in its Yuba City, Calif., plant. But, as the world's largest handler of prunes, apricots and other dried tree fruits, the grower-owned cooperative handles production and distribution of more than one-third of the prune market worldwide.

Sunsweet directs a global network that provides products under the Sunsweet brand in more than 60 countries, making it a true global brand. “One key tip we employ when dealing with our overseas concerns is to establish good relationships by performing test marketing rather than simply rolling out over large areas,” says McLemore. “We also ‘overcommunicate’ rather than allow issues to get lost in translation.”

Another important but oft-overlooked technique McLemore suggests is to do the homework necessary to create and allow for realistic timelines when managing overseas operations.

A game of chicken

 

Tyson country manager Jim Rice signed documents setting up Tyson’s operations in China. While he hired a local management team, Rice remains in China and stays in contact with Tyson headquarters. You can’t run a Chinese plant from Arkansas, he says.
Tyson country manager Jim Rice visits a street market in China: When Kentucky Fried Chicken set up shop in China, the fast-food chain wanted a familiar partner like Tyson handling local sourcing of chicken.

, Springdale, Ark., understands global in a big way. The protein giant, with plants in 20 countries and an established presence on three continents, produces, processes and sells more than $25 billion poultry, pork and beef products a year. As with many companies, Tyson has a strong foothold in China and a decades-long track record in the rapidly escalating market there. Tyson Foods Inc.

“Compared to other opportunities, any country you could go to — even a substantial business in East Europe or South America — would be nothing more than a ‘rounding error’ compared to China,” says James Rice, vice president and country manager-China for Tyson.

Tyson is responsible for a substantial portion of U.S. chicken product exports to China. This includes about enough frozen chicken feet to give one to every man, woman and child in the world’s most populous country.

“China’s economic growth, at 10 percent yearly, ‘times’ the population base equals the greatest economic boom in the history of humankind,” Rice exclaims. “China moved 300 million people out of poverty and created 100 million middle-class consumers. Within 20 years China will have purchasing power parity equal to the U.S., and in 30 years will surpass it.”

Rice warns that, even if a company is a world leader in its niche, it soon will lose that lead by ignoring China. Tyson started working with China in 1991 exporting chicken and chicken parts to China. The company recognized early on that product considered waste, such as chicken feet and wing tips, were prized in China. In a normal business year for the poultry industry, one quarter of the profits is derived from exports to China, Rice notes.

The company quickly moved into building plants there, to serve both domestic and global needs. “Inside China, we have a processing facility for nuggets and patties for global customers, and a pork processing plant in Shanghai for primarily domestic consumption,” says Rice.

Tyson is starting a fully integrated poultry operation — “from egg to table” — outside of Shanghai. It will be the first built for operation at the highest hygiene level and will provide raw chicken in tray-packs, increasing average shelf-life of chicken from 24 hours to 14 days.

Think locally, wrap globally

The U.S. is seeing rapidly accelerating consumer demand for fair-trade, eco-friendly and sustainable business practices. Not carrying these green concepts overseas can smack of colonialism to those behind that agenda here.

 

More on the web

Four steps to China: One billion hungry customers await you” offers an overview of what it takes to establish a food processing operation in the People's Republic of China. The webcast features Tyson’s Jim Rice plus Alex Bryant, president of East West Associates; and Jeff Olin, managing partner of international tax services for accounting firm Grant Thornton LLP.

 

But globally sourcing food packaging — eco-friendly or otherwise — can be fairly intimidating, cautions Luke Vernon, vice president of operations for the Boulder, Colo.-based Eco-Products Inc., maker of compostable plastic products.

“There are several steps that should be taken to ensure proper safety and procedures exist when it comes to product packaging overseas,” he says. “First, although U.S. law doesn't require importers to verify factory working conditions and certifications, processors should visit the factory they want to do business with. It's important to see first-hand what the working conditions are like and to build a good relationship from the start.” Vernon cites the importance of face-to-face meetings in other cultures.

Regarding certifications of overseas plants, some of the most important ones in the food packaging industry are ISO and HACCP. Vernon recommends having third parties audit the factories to ensure they meet both processor and customers’ standards.

“Additionally,” Vernon adds, “conducting third-party tests of the products is important for verifying the products are what the factories say they are. Sadly, there are factories out there that will promise one product and manufacture a different, modified product.”

Eco-Products works with the Biodegradable Products Institute to certify its products are compostable. BPI has biodegradability standards for food packaging and ensures claims of product biodegradability are legitimate.

Vernon also recommends companies randomly conduct content analyses of such packaging products and test for the existence of certain dangerous materials, for example lead. Although there are no U.S. government regulations requiring such testing in foodservice disposables, the tests are important for building customer confidence and ensuring what is promised is what is delivered.

 

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