Analysis Of Trade Issues And Economy Of Argentina For Costa Coffee

Background information of the company and economy

Argentina has been one of the developing countries with a market economy and is a part of the South America. As per the analysis on 2021, the firm has been able to be grow significantly with regard to the national economy based on the nominal GDP. Further, the country has been 25^th largest goods exporters and 20^th goods importer. As a developing country, Argentina has significant growth potential and areas of growth. As per the report of International Monetary Fund, it is evident that the GDP growth of the country has been expected to be rapid in the year 2021. In the year 2022, the Argentinian economy has been seen to be declined on the 50% in year 2018. The outbreak of the coronavirus has been found to be significantly affecting the economic condition (Peralta-Ramos 2019). The Argentinian GDP has been projected to be 1.1 percent larger post the pandemic and the increase will signify rapid growth of the economic situation. The economy of Argentina has been found respond rapidly and the government of Argentina has provided economy package to respond to the pandemic. With that being said, it can be noted that the country primarily depends on the agriculture and the dairy products (Helpman 2011). The economy of Argentina has benefitted from different rich natural resources and it based on the export oriented agricultural sector. The economic performance of the firm has been perceived to be uneven and post the economic recession, the poverty and income inequality has been seen in the economy. Despite of that, Argentina has been able to focus on the agriculture and has been able to account for significant amount of the total GDP of the country. For the purpose of the report, Argentina has been selected as the country since the country has faced with significant trade issues in recent times which can affect the production of its agricultural products such as coffee, sugarcane and so on. For the purpose of the analysis, the economy of Argentina has been selected in which the firm Costa coffee is going to operate. Costa Coffee is a British coffeehouse chain headquartered in the United Kingdom. The firm is constantly concerned with the quality of its coffee and the pleasure of its customers. The analysis will present information related to the economy, evaluate key trade issues in Argentina as well as evaluate the company with regards to different theories.

Analysis of key trade issues

Costa Coffee is a British coffeehouse chain that has been headquarter in the England. The firm has been founded by Bruno and Sergio Costa in 1971 and works in supplying different types of roasted coffee to the caterers and coffee shops. The company always tend to focus on the quality of its coffee and focuses on customer satisfaction. The firm has focused on providing ironic blend between Arabica and Robusta beans that is slowly roasted for 18 minutes for ensuring that the coffee is of health flavor, rich aroma as well as smooth taste (Maamoun 2020). Since the foundation, the group has been able to operate worldwide across 30 countries and has successfully operated in 2861 stores. With that being said, it has been also evident that the firm has been able to open 1755 restaurants in UK as well as 1106 outlets overseas. The fair-trade coffee distribution related issues have become one of the most significant issues which has been seen to impact on the trading and distribution of the firm’s coffee globally and in Argentina. Further, it has been found that changes in climate condition, flooding or any changes to the legal requirement can restrict on the trade of coffee products across the globe. The primary competitors which the firm will encounter in entering the Argentinian market are coffee town, Negro Cueva de Café, All Saints Café and Lab Tostadores de Café. Without understanding the strategic operations of the competitors, the firm will not be able to compete efficiently with the firms.

A transition economy or emerging economy is an economy which is changing from the centrally paced economy towards the market economy. In the transition economy, there are some characteristics present which include liberalization, macroeconomic stabilization, privatization as well as institutional reforms (Hill and Hult 2016). The economy of Argentina is seen to have all of the four abovementioned characteristics therefore the economy can be termed as the transition economy. Currently, the economic condition of Argentina has been seen to improve significantly therefore firms operating within the economy definitely will have the advantage of trade and agriculture (Grossman & Helpman 2005). The In Argentina, the demand for coffee product has been found to increase significantly over the year and it has been found that the revenues for coffee product in Argentina has been amounted to US$1,032m in 2022. Analysts have also forecasted that by the year 2025, the economy will be able to improve its spending by 93% and its volume consumption of coffee product by 15% which can denote that the company has significant amount of growth opportunities keeping the trade issues aside.

In the Argentinian economy, there are several key trade issues which will affect the operations and cause trade barriers for Costa Coffee. Without analyzing the factors, it will not be possible to understand the trading condition of the economy and the operability of the firm in the economy (Ahluwalia 2002). The following section denotes the key trade issues within the Argentinian economy that has been seen to affect the coffee industry significantly.

During the year 2001 and 2002, the export rates in the Argentinian sector become affected by the nonexistent export duties. After the increase in the export duty, there has been severe downturn in the competitiveness in the industry which has overall affected the economic situation (De Pelsmacker, Driesen & Rayp 2005). Further, it has been also prevalent that the export rate structure was also not uniform which has affected the manufacturing firms and for the same reason, the export rates of the Argentina were significantly lower in the recent times. Due to the various reforms of the export system, there has been also a steep decline which has severely affected the overall system of Argentina and created external shocks which has affected the competitiveness of the sector. Further, the VAT revenue has perceived a decline in the nominal terms as well as in then real terms which has affected the overall revenue of Argentina by 40% (Atzeni and Grigera 2019).

Figure 1: Trade policies in Argentina

Source: (Atzeni and Grigera 2019)

The increase in tax rate and gasoline prices has been also affected the real revenue of the industry. Moreover, Argentina also needs to strong currency to pay for its foreign debt payments as well as access to the international capital market. Without understanding the key issues related to the trade account surplus and negative effect of export taxes, in would not be possible to evaluate how severely it has affected the export behavior of Argentina (Buchan & O’May 1999). There are some genuine concerns on the export rates which has severely affected the trade structure of Argentina and no argument has been found to be in favor of the current export tax structures of Argentina. Without redistributing income from rural products to the urban customers, the current export rate structure will continue to impact on the trade system of the country negatively (Mendes dos Reis etal 2020).

There are also genuine revenue concerns which has affected the overall trade system of the country negatively and in order to deal with the situation, it is advisable for the country to simplify the system by establishing a single rate affecting all the products (Hesse & Rodrigue 2004). The current economic situation has been seen to be growing rapidly in the year 2017 however after the period of financial crisis, the economic condition has been affected by 10% in the year 2020 due to the severe affect of the covid 19 pandemic. The key drive behind the complexity in Argentina remains focused on the changes in legislator system, implications related to foreign currency as well as rising levels of inflation (Alvaredo, Cruces and Gasparini 2018). Despite of various efforts taken by the government in promoting the new trade agreements as well as optimizing the trade flow, there are still some changes yet to be made in order to address the trade issues within the country (Attanasio, Goldberg & Pavcnik 2004).

After the severe affect of the covid 19 pandemic, the government has introduced various types of legislative changes which has somewhere positively affected the current trade situation and improved current job security (Alvaredo, Cruces and Gasparini 2018). However, the current trade and business environment in Argentina post the pandemic has been significantly affected which has made the economy vulnerable to trade shocks. For the operations in Argentina, sending and receiving payments from foreign country is also a challenge since there are various regulations which limits the international transfers (Wade 2003). Without the money being transferred, it would not be possible for the businesses to pay off its import invoice or any other trade related expenses. For instance, operating in Argentina will require a business to have different types of documentation process which can massively complexify the trade system associated with the country (Sili and Dürr 2022). Further, it has been also evident that the country has been facing severe issues related to inflation and currently inflation in the country has been above the head which is a risk factor for the foreign business. Overseas trading of coffee products within the country has been also seen to be one of the most challenging tasks to execute (Kokko 2004). There has been various process embarked by the Argentinian government in the process of commercial operations which can constrict the trade flow within the country (Noe etal 2003). Despite of different types of economic reforms and optimization of international trade and diversification, it is still a question whether the government has been able to address the trade issues within the country or not.

Figure 2: GDP per capital of Argentina

Source: (Shadikhodjaev 2017).

As per the findings of the most recent research, it was also evident that there are a number of factors which has caused a barrier to the current trade and business operations in the current economy (Shadikhodjaev 2017). A recent survey conducted within the economy came out with the result that the labor regulation remains the highly problematic factor affecting the overall trade system of the country. Further, it has been also evident that the country has not taken any measures to reduce the barrier to significant extent. In addition to this, access to capital and import related regulation has been also seen to affect different areas of trade and the overall coffee industry. Lack of clear set of regulation for the public has also been affecting the current trade system of the country and it has been found from recent research that the current tax code of the country is severely complex and it varies in different provinces. Further the bureaucratic requirement for the participation of public procurement has been also seen to affect the coffee and other industry massively (Shadlen 2005). It takes significant amount of time and effort of companies to comply with the existing set of rules and regulations.

There are also some non-regulatory factors which has been seen to affect the overall trade system of the country and it can also cause Costa Coffee to reduce their business chain in the country. Across the non-regulatory factors, the increasing amount of inflation, political risk as well as corruption has been the top problematic areas which has affected the business environment and can also cause Costa Coffee to slow down its business operations (Meltzer 2018). Without adhering to the current set of policies (which is complex), it will not be possible for the company to improve its existing operating environment and to improve the overall trade environment (Wacziarg 2001). Along with this, unpredictability of the regulatory changes within the country also remains one of the key problematic factors and therefore the government will have to focus on facilitating the compliance rather than the regulations to improve the current trade system within the country.

There have been various theories which has seen to affected the trade and business environment. For competing and surviving within the current business environment in Argentina, Costa Coffee will have to focus on the following theories which will allow it to reduce its business complications also allow it to achieve growth in different areas of business.

Global strategic rivalry theory was emerged on 1980 by Paul Krugman and Kelvin Lancaster. The primary focus of the theory remained concentrated on gaining competitive advantage against other global firms. As per the theory, for achieving success in different areas associated with business operations, it is essential Costa Coffee to focus on the competition in the current sector and analyze how they can create competitive advantage within the industry (Weiss 2011). A firm can gain sufficient amount of competitive advantage if they do not have barriers to the industry. The barriers to the industry are refereed as the obstacles that a firm will face when they are focusing on entering new market or industry. Since Costa Coffee is trying to enter the Argentinian market, it will have to face different types of barriers related to the inflation, changes in regulatory policies, access to effective government policies and so on (Harrison & Hanson 1999). Therefore, it is crucial for the firm to focus on research and development, economies of scale. Further, Costa Coffee will also have to understand the economies of scale which will allow it to improve the existing business environment. In this context, the firm will be also be benefitted with the help of unique business procedures as well as methods that are required to operate in the industry. The business must have to understand the access to raw materials and should always be able to control the resources or access to raw materials in order to improve the current business situation effectively (Lippert, Perthes and und Politik-SWP-Deutsches 2020).

There is various exclusive right with respect to the manner in which information is expressed and owning intellectual property rights will allow the business to improve the current state of operations as well as will allow it to strategically compete with the existing competitors of Argentinian market (Peng 2021). Further, it has been also evident that the business can be able to benefit from the investment in research and development which will improve the current state of business operations of Costa Coffee. Costa Coffee will have to research about the areas of development as well as will have to deliver innovations through the supply of its coffee products. In fact, the firm will be able to understand and leverage its existing strengths by achieving the economies of scale which will allow it to reduce costs and expand market share of the company. with the understanding of the learning curve, the business can be able to reduce costs and add value to its current products which will allow it to compete with the existing competitors of the business efficiently. Further, the business can also focus on improving the current business with the help of cost leadership strategy. After entering the market, it is also advisable for the business to form strategic alliances with top coffee businesses which will allow the business to meet its existing set of objectives as well as will also allow it to emphasize more on the area of competition. After the company has expanded the operations within the country, it would be also advisable to involve into mergers and acquisitions which will allow the firm to focus on collective growth.

Michael Porter has developed the theory of competitive advantage in the year 1990 to understand how competitiveness can affect an industry. As per the theory, there are certain determinants which affects the working environment of a business. This includes local market resource and capabilities, local market demand conditions, local suppliers and complementary industries as well as local firm characteristics. These determinants are picturized below.

Without analyzing the natural resources and the amount of natural labor, Costa coffee will not be able to understand whether they will be able to import or export their products globally. Further, it is also essential for Costa Coffee to understand that investment in education, technology as well as infrastructure has been seen to provide a country with significant amount of competitive advantage (Konsolas 2017). In order to advance through the emerging economy of Argentina, Costa Coffee will have to focus on the continuous innovation and the development of new products as well as technologies.

Further, it is also essential for the local firms of the economy to remain competitive which will support the growth of the economy and will provide efficiencies and productivity towards the economy. The competitiveness of Costa Coffee will be massively dependent on the different set of factors including strategy, industry structure and rivalry across the industry (Vlados 2019). The local strategy has been found to affect the competitiveness of a firm and thus Costa Coffee will be no exception to this. Without having a healthy rivalry between the local firms, an economic growth will not occur and therefore the economic situation of a country will not be able to prosper further. Therefore, Costa Coffee will have to understand these factors in order to prosper efficiently within the economy.

The product life cycle hypothesis was formed in the 1960s, Raymond Vernon, a Harvard Business School professor. According to the marketing theory, each product life cycle comprises three different stages: (1) new product, (2) mature product, and (3) standardized product. The notion anticipated that the new product's manufacture would take place entirely in the nation of its invention. It was a useful notion in the 1960s to understand manufacturing prowess. Following World War II, the United States became the world's major producer in a variety of sectors. It has also been used to describe the life cycle of a personal computer (PC). In the 1970s, the PC was a novel product that evolved into a mature product. The personal computer (PC) was a novel product in the 1970s that matured in the 1980s and 1990s. The PC is now at the standardized product stage, with the majority of manufacturing and manufacture taking place in low-cost Asian and Mexican countries. The product life cycle hypothesis has been less successful in explaining modern trade trends including global innovation and production. Global corporations (Tyulin and Chursin 2020), for example, perform research and development in emerging countries where highly trained people and facilities are typically less expensive. Therefore, Costa Coffee will have to understand the set of factors that have been affecting the product development phase and should also understand why the product can become successful in the existing market. This will allow the firm to improvise the current state of product development as well as will also allow them to expand their market shares significantly over the years.

Conclusion

On a concluding note, it can be noted that the after understanding on the set of aforementioned factors, Costa Coffee will be able to reduce the trade related barriers affecting their business. Due to the many reforms of the export structure, there has also been a sharp fall, which has significantly impacted Argentina's entire system and caused external shocks, affecting the sector's competitiveness. The rise in tax rates and fuel costs has also had an impact on the industry's real revenue. Furthermore, Argentina requires a strong currency in order to service its foreign debts and get access to the international capital market. It is impossible to assess how badly Argentina's export behavior has been influenced until the major concerns relating to the trade account surplus as well as the negative impact of export taxes are understood.  There are also serious revenue problems that have badly impacted the country's general trade system, and in order to cope with the situation, it is recommended that the government simplify the system by adopting a single rate that applies to all items. Following the devastating impact of the covid 19 epidemic, the government implemented a variety of legislative measures that have had an impact on the present trade position and enhanced existing job security. However, Argentina's present trade and business climate has been considerably impacted as a result of the epidemic, making the economy sensitive to trade shocks. Sending and receiving money from foreign countries is also a barrier for enterprises in Argentina due to different rules that prohibit international transfers. According to a recent poll done within the economy, labor regulation remains the most troublesome aspect influencing the country's overall trading system. Furthermore, it is clear that the nation has not taken any meaningful steps to decrease the barrier. According to the idea, in order to achieve success in many aspects of company operations, Costa Coffee must focus on the competition in the present sector and assess how they can develop a competitive edge within the industry. Costa Coffee's competitiveness will be heavily influenced by a variety of elements such as strategy, industry structure, and industry competition therefore, the firm will have to understand the set of factors influencing the trade issues which will allow it to improve the business operations in Argentina.

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