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Creating a Limited Liability Co. to import coffee into Ukraine directly. Economic and financial analysis

Extracts from this document...

Introduction

The company I'm planning to create is a Limited Liability which exports roasted and ground coffee directly, purchases coffee beans directly from the manufacturer in Brazil, Colombia (top coffee producing countries), then sells overseas. The given Export Management Company (EMC) is an independent firm which functions as an exclusive export sales department, representing the product along with various non-competitive manufacturers and operating on a commission basis. As the world coffee market is a quite developed one, the company should use the adaptation strategy when entering the market to coordination the company's operation with the existing market environment. The company establishes a strong foreign distribution system, hires experts on business conditions abroad and focuses on Ukraine as a country to export into with further opportunities of growth. Ukraine is chosen to be the targeted country because it is a developing country of Eastern Europe where coffee market has a great potential to grow and coffee consumption is steadily increasing. The company must have a division for Ukraine. Once it is organized to handle exporting, a proper channel of distribution needs to be carefully chosen. These channels include sales representatives, agents, distributors, retailers, and end users. Agreements with coffee supplying companies may also be an easy foreign market entry method when the manufacturer is already producing coffee for the domestic market. It is also an initial instrument to create a subsidiary company in a foreign country. It is a method of indirect distribution to foreign markets. Ukrainian customers will be buying our due to several reasons. First of all, number of cafes and stores in the country is constantly increasing while number of coffee products, providers and manufacturers is still quite limited. Secondly, Ukrainian market is full of instant coffee while it's becoming less popular than coffee beans and ground coffee. As it was mentioned above, the company does not purchase suppliers but purchases coffee directly from manufacturers. ...read more.

Middle

When the dollar is strong, the company will have to spend fewer dollars in order to get a particular amount of another currency, and, when the dollar loses value; such an operation will be more expensive. Currency futures are often used to hedge currency exchange risks. It is a futures contract which enables a company to exchange hryvnas for dollars on some certain day in future at a price that is fixed on a last trading day. This can be profitable depending on the rising or falling exchange rate. If we, for example, buy a 25 July CME Hryvnas currency futures at 5.27240 UAH/USD, and the future close at 5.2900 at the end at the day, having bought a contract for 100,000UAH, we get a profit of USD 1,760 because the change in price made 0,0176. In case the Ukrainian currency rises in price, currency options may used to hedge the currency exchange risks. Currency options allow the company to buy or sell certain amount of hryvnas at a specified price before the specific date. Such an option may help the company to avoid possible results of unfavorable currency movements. Unfortunately the Ukrainian hryvnas are not included into the CME futures list; hence, this particular option of hedging currency exchange risk is not available in Ukraine. As for the prevailing spot rate, 1 US Dollar equals FXCrossRate Results Saturday, July 22, 2006 Currency names US Dollar Ukraine Hryvnia US Dollar 1.0000 0.1910 Ukraine Hryvnia 4.7950 1.0000 Currency Exchange Rates provided by OANDA, the currency site. USD/UAH: 5.00 � 5.06 (next move) negative for the UAH. However, USD/UAH fell back to 5.00 last week and there were no inter- ventions on the market last week. The National Bank of Ukraine (NBU) said that in the first quarter Ukraine probably had a current account deficit of USD 500 mn and capital outflows of around USD 2-3 bn. ...read more.

Conclusion

Hence, I believe, in situation when a company is deciding whether to start operating abroad the most important issue is the political and economical climate of the target country because all the other risks may be either managed or even be of some positive use for the company. In summary, based on everything stated above I would conclude that domestic companies face not less different risks than multinational ones, and if a company takes a decision not to work overseas, such a decision may have been caused mostly by independent political and economical risks in the particular country. Advantages of Using an EMC/ETC * Faster entry into the overseas market in terms of first recorded sales. * Better focus on exporting, because most firms give priority to their domestic problems. * Lower out-of-pocket expenses. * An opportunity to study the methods and potential of exporting. * Expertise in dealing with the special details involved in exporting, as well as its strategies. . Sales Representatives The representative uses the company's product literature and samples to present the product to potential buyers. The sales representative works on a commission basis, assumes no risk or responsibility, and is under contract for a definite period of time (renewable by mutual agreement). The contract defines territory, terms of sale, method of compensation, reasons and procedures for terminating the agreement, and other details. The sales representative may operate on either an exclusive or a nonexclusive basis. Foreign Retailers A company may also sell directly to foreign retailers. The growth of major retail chains in markets such as Canada and Japan has created new opportunities for this type of direct sale. This method relies mainly on traveling sales representatives who directly contact foreign retailers, although results might also be achieved by mailing catalogues, brochures, or other literature. The direct mail approach has the benefits of eliminating commissions, reducing traveling expenses, and reaching a broader audience. The firm should investigate potential representatives carefully before entering into an agreement. ...read more.

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