Introduction Oil and Vinegar (O&V) is a culinary gift shop, founded in 1999.

Focusing formerly only on the Dutch market, they expanded in 2002 to the United Kingdom, Belgium and Germany. The concept of this gift shop was extended in 2004 by entering the US market. At present, O&V operates in ten countries, spanning three continents. There are seventy O&V stores worldwide. O&V their product line include pastas, oils, starters, appetizers, salads, dressings and vinegar. O&V focuses on a Mediterranean flavour, originated from France, Spain and Italy. Operating as a franchise prior, O&V asked project group 9 to conduct a Feasibility Study on the city of Moscow. The company would like to enter the Russian market by opening a wholly owned subsidiary store. The purpose of this study is to investigate whether the Russian market is feasible for opening an O&V store. This report consists of two parts. The first part focuses on the marketing feasibility. Concepts that are studied include market size, segmentation, targeting, competitive conditions and the market potential as whole. The second part focuses on the financial feasibility, where it is investigated which investments and costs will be made, and if it is profitable to open a store in a time span of three years.

Marketing Feasibility In this part of the report, it will be investigated if the demand for culinary gifts is great enough in Moscow. Subjects studied include market size, expected growth, accessibility of the market, attractiveness, segmenting, buying power, cultural differences and government regulations. Market size and Expected growth The Food market in Russia is growing. Since the income in Russia is ascending, the purchasing power of customers is increasing. The total Russian Food market size in 2009 was 314.4 billion dollars, which is equal to 9,955.5 billion RUB. The compounded annual growth rate is 25.7%. (Appendix 1) There are 141,750,000 civilians in Russia, who form 52,682,000 households. As stated before, these households consume 314,400,000,000 dollars in food products annually. In the city of Moscow, there live 10,547,000 people. With this statistics, the average food product consumption per household in Moscow can be made. People per household in Russia:

Households in Moscow:

Note: Due to a lack of sources and statistics for the city of Moscow, this number is merely a rough estimate. This report compares the demographic data for Russia as a whole with the city of Moscow, which does not provide the genuine number. This report states that an average number of well-nigh 3 people per household is relevant for a city like Moscow. Annual average food consumption in Russia per household:

Compounded food consumption in Moscow (market potential):

Russias GDP is growing with an average of 1,5% annually, as seen in Appendix 2. The average Annual Gross Income grew in 4 years with 30%. These numbers indicate that the purchasing power of households is growing vastly, thus households are able to reach high levels of spending. The increase in income is a good development for O&V, since the company offers premium priced products. According to Appendix 3, there is an average annual growth rate of 20.5% forecasted for the Russian food market. The market value for the total market is forecasted to be 25,260.0 RUB (792.7 billion dollars) in 2014. This is a 153.7% growth in the period 2009 2014 The Russian food market is a growing market. Based only on markets size and expected growth, this is a feasible market for O&V.

Accessibility of the market In this part of the report, the accessibility of the market is investigated. Using Porters Five Forces, the degree of competition and the accessibility for a new player in the market is analysed. Buyer power There are two customer developments in the Russian market which are a concern for O&V. Firstly; there is a growing demand for food quality due to a rise in health consciousness. There seems to be a switch to fresh food products. This is an opportunity for O&V, since they have a biologically product range, and Mediterranean food is seen as healthy. Secondly, O&V can justify higher prices, since a speciality store can differentiate their products. Since O&V is a culinary gift shop, where the consumer can buy culinary products, the company has differentiated products. Supplier power Since Russia scores relatively high on the Uncertainty Avoidance Index, it is logical to state that retail companies often maintain relationships with a wide range of suppliers, to have the least risk. Large retail companies often maintain relationships with a wide range of suppliers. However, supplier power is not relevant for O&V. Distribution is via Oosterhout, in the Netherlands. Degree of rivalry The Food and Drinks Speciality Stores market segment have a compounded market share of 20.3%. This could be an indication that there are more culinary shops in the Russian market. Large retailers can be seen as rivals as well, since they often offer culinary products in their assortment. In the Netherlands, the large retailers have premium product lines, which can be seen as competition for speciality stores like O&V. Substitutes There are only a few substitutes for food retail, namely food service, fast-food companies, and subsistence agriculture. However, these substitutes do not replace food retail but rather accompany it. This is not a large threat for O&V when accessing the market, thus should not be a large concern for management. New entrants The aggressive pricing of large retailers are a threat for new entrants in Russia. However, the threat of new entrants is strong. The concern for quality products due to the rise in consumers health consciousness are an opportunity for new retailers in the market. Since O&V is a new entrant, differentiation and offering quality products are key terms in entering the Russian market. Concerning Porters Five Forces, O&V has to differentiate with their products. High prices can be justified due to the differentiation. The consumers rise in health consumers can be seen as a big opportunity for O&V, since Mediterranean products can be promoted as quality health products. In order to enter the Russian market, To achieve more sales, O&V should focus on a pass on health market campaign.

Attractiveness of the market Appendix 4 shows the drivers of rivalry in the industry. According to this scheme, rivalry in this market can be very fierce. In this part of the report, the most important drivers of rivalry in the Russian are analyzed in order to measure attractiveness. Competitor size As seen in the appendix, the sizes of the competitors are large. The table also shows that a large part of the industry is made up by large hypermarkets and outlets. However, since O&V sells differentiated products in a specialist store, these large competitors are not a big threat. However, as stated before, large retailers offer luxury product lines, thus these large retailers could be seen as a competitor. Easy to expand Since the market is just entered by O&V, its easy to enter and expand. The entry and exit costs in the Russian market are low, easy expanding means there are opportunities for growth in the market. Lack of diversity The appendix shows that there is a lack of diversity in the Russian market. O&V is a store which offers diversified products. Compared to the other competitors O&V can offer differentiated products. O&V has competitive advantages when differentiating from their competitors. Low cost switching The consumer does not have large costs when switching to products. This could be seen as a threat for O&V, since O&V offers premium priced products. However, there are a lot of people with a high income living in Moscow. The low cost switching by the average consumer could not be seen as a threat, since O&V does not target these consumers. Storage costs Storage costs are a cause of high rivalry in Russia; when operating in a densely populated town as Moscow, these cost will be even higher. In the financial feasibility part of this report, the storage costs for the O&V wholly owned subsidiary are calculated. It is investigated that a repository in the store itself costs 4000 euros per square meters. This could be a threat for O&V, since the distribution is via Oosterhout. Storage costs could be seen as a threat for O&V. After independently analysing the drivers of rivalry, it is concluded that the market is relatively attractive. Especially the lack of diversity and the easiness to expand makes the market attractive for an O&V store.

Segmenting, locating and targeting decisions Because O&V is a culinary gift shop, it can be segmented in the Food and Drinks Specialists segment. This segment has a 20.3 market share. As stated before, the total Russian food market potential can be calculated as follows: Annual compounded food consumption in Moscow (market potential): ( ) ( )

With a 20.3% market share in the Russian market, it can be estimated that this number applies to Moscow as well. However, due to a lack of sources of the city of Moscow, this report does not provide a valid number, solely a rough estimate.E Estimated annual compounded food and drinks specialities spending in Moscow (market potential):

Moscow has a lot of shopping streets, with Tverskaya Street as the best-known street of Moscow. The most expensive street in Moscow is Stoleshnikov Lane, with rents up to 7015 per square meter (Goossens, 2011). O&V would like to have a location at a A1+ rating, thus Tverskaya Street or Stoleshnikov Lane are the best locations for O&V to open a store. Russias income distribution is as follows:

100 90 80 70 60 50 40 30 20 10 0 0 20 40 60 80 100

Figure 1 - Russia's income distribution 2011 (World Bank, 2011)

As seen in the graph, Russia has a very unequal income distribution. This is good for O&V, because the company focuses on the higher incomes rather than the lower incomes. With a premium pricing strategy, O&V has to target on higher-income households. These households are 50% of the households in Russia. This report claims that the income distribution in Moscow is approximately the same as Russia. Higher incomes in Moscow:

These households belong to the richest 20% of Moscow.

Cultural differences It is logical when expanding to another country to look at the cultural differences between the home country and the other country, as many mistakes are being made in this transition. In this part of the research, business differences and differences in both cuisines are investigated. When doing is business in Russia it is important to realize that there are certain differences between doing business in Russia and doing business in the Netherlands. One must know that there is a centralized management style in Russia; this means that there is usually one big boss to whom all the subordinates answer to. Usually, there is little consultation between the layers within a company; a top-down style is preferred. Furthermore, when going to Russia it is recommended to acknowledge the differences in the level of English Russians have. Many of the young employees living in Moscow and Saint Petersburg have a fluent command of English. However, when speaking to employees living outside of these cosmopolitan cities it is not unusual to encounter someone who does not have a fluent English level. Employees should be hired who master Russian and English, for good communication between Dutch and Russian management. When looking at the cuisine of both countries, it is easy to see that the Dutch cuisine shows a lot of similarities with the Russian cuisine. As Russia is a northern country with a long-lasting winter, the food should give much energy and warmth to survive. Therefore, the essential components of the Russian cuisine are the ones that provide more carbohydrates and fats rather than proteins. Basically, the main ingredients of the Russian cuisine are potatoes, bread, eggs, meat and butter. This does not vary a lot from the basic ingredients the Dutch cuisine withholds. The specialties Oil and Vinegar sell match neither the Russian nor the Dutch cuisine, however it should be realized that globalization is a considerable factor to look at when trying to get to know whether the inhabitants of a country or city are willing to try new things. The higher a country or city scores on the globalization index, the more the inhabitants are willing to try new things like food and beverages. The globalization index consists of more factors, but were focusing on this one thing only as it complies to our segment. Since 2010, Moscow raised 6 places in the Globalization index of Global Cities. This means that especially- Moscow is becoming more and more global and the inhabitants are easily attracted by new fields of interest coming from foreign countries. This also includes foreign food specialties like the ones Oil and Vinegar offer. To conclude, the cultural differences regarding business are greater than the cultural differences regarding cuisine. Therefore, the focus should be on adapting to the Russian management style more than adjusting or modifying the Oil & Vinegar assortment. After all, the cultural differences should not be a big problem when expanding an Oil & Vinegar store to Moscow.

Government regulations Governmental regulations concerning taxes Within the Russian Federation the Vat of specific products is 18%. Furthermore, there is a general tax rate of 24%, and a 20% tax for activities of foreign organizations that have no permanent establishment within the Russian Federation. Finally there is a Unified Social Tax of 35.6% with a regression scale, so the higher the income, the lower the taxes. Additional regulations within the Russian Federations An economic entity involved in trading activities is not allowed to buy or lease additional floor space, when the market share of that specific entity in money terms exceeds 25% of the total food market. Furthermore, there is additional legislation regarding the payment period of products with a certain shell-life. In short, products with a shell-life of less than 10 days must be paid no later than 10 days after the products where accepted by the entity, , products with a shell-life of less than 30 days must be paid no later than 30 days after the products where accepted by the entity and products with a shell-life of more than 30 days must be paid no later than 45 days after the products where accepted by the entity. Labour Law in Russia The Russian Labor Law states that regular working hours may not exceed 40 hours a week. However, exceptions can be made in the form of overtime. Overtime is allowed to the following extent; 4 hours of overtime in two consecutive days and not more 120 hours of overtime per annum. Overtime must be compensated in the form of additional days-off or paying no less than one and a half times the regular hourly rate for the first two hour, and no less than twice the regular hourly rate for subsequent hours.

Sources http://www.waytorussia.net/business/tax.html http://www.franchise.org/uploadedFiles/Franchise_Industry/International_Development/ Russia.pdf http://en.fas.gov.ru/legislation/legislation_50728.html http://www.miga.org/documents/VF_ESIA_ESMP_annexes_v2_%201310.pdf http://www.worldbusinessculture.com/Business-in-Russia.html http://www.waytorussia.net/WhatIsRussia/RussianFood.html http://en.rian.ru/russia/20120403/172587699.html