Case Study of Sprinkles Cupcakes
Sprinkles Cupcakes is a company that produces and sells cupcakes of different flavours. The company has a premium pricing strategy. Currently, the firm has stores in the USA and Kuwait. The company’s products are popular in both countries, and the company wants to open more stores in other countries of the Middle East. Those countries can be considered favourable for the company and its products. Many countries in that region deal in oil, and consumers have incomes that allow them to buy premium products. Their economic conditions are favourable as well. Nevertheless, Sprinkles Cupcakes may experience certain problems in that market. First, the local religion, namely Islam, determines local tastes and culture, and cupcakes should be adapted to them. Second, the level of corruption is high in the region, and it may create some problems for business.
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The country the company decided to open the business in is Saudi Arabia. The main reasons to select this country are the high income of customers, large size, high population, high level of urbanization and availability of large cities, large percentage of young people and children in the country’s population, a good infrastructure, and favourable conditions for doing business. Thus, the company is likely to find many potential customers there, and it will be able to open many stores. In order to enter this market, Sprinkles Cupcakes should follow the transnational strategy of internationalization. This strategy will include selling traditional American cupcakes in the new market and offering new tastes adapted to the local traditions, as well as designing new products like ice cream, frozen yoghurt, and traditional Arabian sweet stuff. In this strategy, adaptation to Islamic rules and traditions is especially important. In terms of entry mode, it is more efficient to select a joint venture. Such a strategy will allow to cooperate with a local company that better knows the market, potential vendors, customers, and favourable locations.
|Cultural distance||Political distance||Geographic distance||Economic distance|
|External distance||· Sprinkles Cupcakes wants to enter the Middle East market where the common language is Arabian
· Arabs are the main ethnicity in the region
· The cultures of countries have much in common
· The common religion in the region is Islam. It influences the business operations and peculiarities of products sold
· Local values and norms are determined by religion and cultural values
|· The countries have mostly good relations with Western countries
· Countries in the region have different currencies, and it may create certain problems for business
· Each country has its own legal system
· The problem of corruption is topical in the Middle East. Approximately one third of people paid bribes in the previous year. Egypt and Morocco are the countries with the highest bribery rates (Aljazeera 2016).
|· Physically, all countries are far from the US.
· They have borders between each other.
· Time zones: from UTC +1 to UTC +3 (Time and Date 2016).
· In all countries, climates are hot
|· Levels of consumer income are different. For example, in 2012 in Kuwait, it was $40,854, in Saudi Arabia – $24,980, and in Lebanon – only $13,004 (Statista n.d.).
· Most countries are rich in oil and gas resources. Infrastructures and distribution networks are developed well. Human resources are sufficient.
|Internal distance||· All countries pay much attention to traditions that are based mostly on Islam
· Countries are not insular
· Islam plays an important role in the society
· To some extent, traditions and culture may be strange for Western people
|· Economies are open, and free trade is possible, although government regulation exists
· All countries are members of international organizations
· In the Middle East, corruption is a big problem
· Social conflicts are currently on the low level
· Risk of expropriation is rather low
|· The geographic size of the region is large, and countries have different sizes
· Countries are located near each other, and they are not remote
|· Countries have medium and high levels of economic development
· Resources and infrastructures are not limited
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Yip’s Drivers of Internationalisation
Trade policies in Middle East countries are mostly favourable for Western companies. The countries in the region are developing fast, and they need to establish effective trade relations with other countries. Technical standards are usually not as high as in Western countries. Therefore, it is beneficial for Sprinkles Cupcakes to enter this region and start its business there.
The cost of cupcakes is expected to be quite high in Middle East countries. Due to the hot climate, not all ingredients are produced there, which may pose a challenge. Moreover, in Islam, some products are forbidden, for example, products that contain alcohol. It may be costly to find substitutes of good quality. Thus, the cost of production may potentially rise. Logistics is quite developed, especially in the countries that specialize in oil trade, such as the UAE and Saudi Arabia.
Marketing is transferable. Since cupcakes are not popular yet in the Middle East, it is possible to transfer their benefits to new markets and stimulate consumers to taste them. The needs of consumers are similar in terms of taste and quality: people want to eat natural and tasty foods. The needs of customers differ in terms of tastes. In the Middle East, local tastes and cuisine differ from the American ones, which directly influences the preferences of customers. Thus, Sprinkles Cupcakes should adapt to local tastes in order to become popular in new markets.
The countries are interdependent as they are located near each other. Thus, it is possible to adapt the global strategy in all of them. At the same time, to be competitive, Sprinkles Cupcakes should use different price levels in each country because customer incomes differ.
How it works:
Which Country Should Sprinkles Consider Expanding Into Next and Why?
Sprinkles Cupcakes should consider expanding into Saudi Arabia. This country should be chosen for several reasons. First, this country is large and has a population of 30.8 million (Index of Economic Freedom 2016). Thus, there are many potential customers in this country, and the company can open shops in several cities. Moreover, Saudi Arabia has a high level of urbanization; for example, in 2015, it was approximately 83% (Statista 2016). Moreover, there are many large cities in this country. In particular, there are four cities with the population of more than one million: Riyadh, Jeddah, Mecca, and Medina (Geo Names n.d.). Due to high urbanization, it will be easier to open stores, because in large cities, the number of potential customers will be higher, and the infrastructure is usually better. Moreover, the age structure of Saudi Arabia is also beneficial for selling cupcakes. The percentage of people from 25 to 40 years constitutes approximately 20%. In addition, the percentage of children is high as well (Population Pyramids 2016). Young people are more likely to try new products than older people are, and cupcakes are new and not traditional products in Saudi Arabia. Children like sweets and bright colours, and the company’s cupcakes meet these requirements. Thus, they are likely to persuade parents to buy them.
Second, the country specializes in oil trade. Thus, the country is rich, and customers will be able to buy even relatively expensive cupcakes. Sprinkles Cupcakes’ products are quite expensive, and it would be wise to sell them in a country with relatively high consumer incomes. Third, Saudi Arabia has relatively good conditions for doing business and economic freedom. Despite having certain challenges related to corruption, the country tries to solve these issues. Moreover, Saudi Arabia has quite high fiscal freedom. Currently, its business freedom and monetary freedom are improving. The level of trade freedom is increasing as well (Index of Economic Freedom 2016). According to World Bank’s Doing Business ranking, Saudi Arabia’s rank in doing business is 82, and it has improved compared to the previous year by two points. Among all spheres, the best improvements happened in the area of registering property and trading across borders, which is quite beneficial for a foreign company that wants to operate in Saudi Arabia (World Bank Group 2016). Finally, Saudi Arabia has great infrastructure projects, and they are aimed to improve the infrastructure of the country in the nearest years. In particular, the government plans to build new roads, introduce new transport and communications, and construct new cities (The Worldfolio 2015). The development of infrastructure is positive for opening business because it is likely to make delivery cheaper and faster, and it will be easier to find vendors and customers.
Which Internationalisation Strategy Should Sprinkles Pursue and Why?
The best variant of strategy for Sprinkles Cupcakes to pursue in Saudi Arabia is the transnational strategy. This strategy will be effective because it combines the multi-domestic and the global internationalization strategy, and it uses the benefits of both strategy types. Under this strategy, the company uses the core product assortment and principles, and it remains unchanged in the country it enters. At the same time, some products are adapted to the local market and consumer tastes. The transnational strategy is beneficial because it will allow the company to offer its traditional product assortment in the new country, and it will popularize the image of the company in the new market. It is easier to offer traditional products than to develop entirely new ones. At the same time, such a strategy makes it possible to adapt to local tastes and preferences, and it is beneficial because not all customers may want or be able to adapt to completely new products. Thus, the transnational strategy is beneficial for Sprinkles Cupcakes because the company will be able to promote its traditional products in the new country, and the company image will be retained. At the same time, the culture and tastes of people in Saudi Arabia differ from those of Americans, and the company should adapt to them to satisfy local customers. In order to follow the transnational strategy, the firm should offer its most popular cupcakes that form its image in the new market. In addition, it is possible to offer several new tastes that are popular in Saudi Arabia but not popular in the US, for instance, some tastes like traditional Arabian sweet stuff. In addition, it is necessary to adapt the company’s products to Islam regulations, like exclude alcohol from all ingredients. It is also possible to offer new products that have not been sold in the US yet. The company may sell ice cream as well, even though it has already been presented in the US. In the hot climate of Saudi Arabia, ice cream may potentially become popular. Moreover, it is possible to offer some other products, such as frozen yoghurt and traditional Arabian sweet stuff, to satisfy mostly elderly people who like traditional tastes. According to this strategy, it is especially important to adapt products to Islam, because buyers may refuse to purchase them if they are not adapted properly.
Which Mode of Entry Should Sprinkles Choose for Your Chosen Country and Why?
It is advisable for Sprinkles Cupcakes to choose a joint venture as an entry mode for Saudi Arabia. This entry mode has certain advantages in this particular situation. The company should form a joint venture with a local company that will help it to become popular and distribute products. It will be beneficial because local companies know the local market well and can distribute the firm’s products. For example, it is possible to set a venture with a local company that will find vendors to buy ingredients, help to choose the best locations for selling, and market the products to customers. Consequently, a joint venture will help Sprinkles Cupcakes access local technologies, core competencies, and managerial skills. A local partner will be more experienced in the market, and it can help to effectively plan distribution and sales. Finally, cooperation with national manufacturers will become easier.
In conclusion, Sprinkles Cupcakes has become a popular cupcakes seller in the US, and the company wants to enter foreign markets to find new customers and increase revenues. The firm wants currently to enter one of the markets of the Middle East, and only one country should be selected. In general, the region is good for doing business. The main problems are corruption and customer preferences that differ from American ones. Moreover, each country has its own economic conditions. Thus, Saudi Arabia was selected as the best option. If it uses the transnational internationalization strategy and a joint venture, it is likely to successfully enter the new market and successfully start business in it. The transnational strategy is beneficial because it allows to bring traditional American flavours in the market and adapt them to local traditions. A joint venture is an efficient entry mode because a local partner knows the local market better and will help Sprinkles Cupcakes to settle in Saudi Arabia.