An essay exploring the effect of the macroeconomic environment in Italy and Russia as it relates to Proctor and Gamble’s international economic activity.
Procter and Gamble [P&G] is the world’s top producer of household products. P&G manufactures a wide range of products from toilet paper and sanitary products to food and cleaners. It can be said that the company produces everything a consumer could need to stock their homes comfortably. June 2014, P&G reported over eighty-three million dollars in revenues during that fiscal year (MarketLine, 2015). P&G’s headquarters are located in Cincinnati, Ohio but the massive company has established operations in almost every country in the world (Harmon, 2015).. The company’s products are sold in more than 180 countries (Harmon, 2015). Around the globe, five out of seven people use P&G’s products (MarketLine, 2015).
The household product market is competitive in its form. The market is a perfect competitive by description but the major companies ruling the industry unofficially create a competitive monopoly. The four major producers have an extensive advantage in the market limiting the successful entry of new entrants.
For the purpose of this analysis the following paper will focus on P&G’s dish soap product lines. The company manufactures and distributes dish soap in both Italy and Russia. Following a comprehensive economic analysis of both countries this paper will conclude with a comprehensive analysis of the affects the economic situation has on the company’s operations in both countries.
Italy is Europe’s third strongest economy (Central Intelligence Agency, The [CIA], 2016). Italy is known as a producer of high-quality products, fine wines and delicious foods (Daniel & Aliprandi, 2014).
GDP & GDP Growth
Italy is currently experiencing a slight recession (Country Monitor, 2015).
The Italian labor force consists of 25.5 million workers (CIA, 2016). By far the majority of Italy’s residents are employed in the service sector (68%) while the industry sector provides employment to almost a third of the population (28%) (CIA, 2016).
General government balances % of GDP
High levels of government debt have jeopardized Italy’s position in the global banking whelm.
Balance of Payments % of GDP
Tax evasion has caused the Italian government a great deal of distress in their attempts to repay their debts (CIA, 2016).
US Dollar/Euro 10 year Conversion (European Central Bank, 2016)
Analysis of the Monetary/Fiscal Policy
As a member of the European Union, Italy is bound by the regulations and policies of the EU regarding international trade (Country Conditions, 2013). Italy’s also has its own Italian Trade Commission, a government agency responsible for overseeing the country’s activities in the international market. The country’s tax system sets consistent rates for both national and international business. However Italy’s corporate tax rate is the highest in Europe (Country Conditions, 2013).
Analysis of the Foreign Trade Agreements and Exchange Rates
Italy is a member of the European Union, North Atlantic Treaty Organization, the Organization for Economic Cooperation and Development, North Atlantic Treaty Organization, the Organization for Economic Cooperation and Development, General Agreement on Tariffs and Trade/World Trade Organization, the Organization for Security and Cooperation in Europe, and the Council of Europe ('Country Conditions' 2013).
Italy is bound by the regulations and policies of the EU regarding international trade (Country Conditions, 2013). Italy’s also has its own Italian Trade Commission, a government agency responsible for overseeing the country’s activities in the international market. The country’s tax system sets consistent rates for both national and international business. However Italy’s corporate tax rate is the highest in Europe (Country Conditions, 2013).
Foreign Trade 2014 (Country Report, 2015)
As illustrated in the table above Italy’s primary trade partners are Germany and France. Italy has also created a strong relationship with the United States (Country Conditions, 2013).
Italy is in the middle of a great deal of government restructuring. The "Italicum" electoral is being revamped. The country is experiencing a great deal of change in their constitution. These changes began in 2014 and will continue until their final implementation on June 2016 (Country Monitor, 2015). The political uncertainty has contributed to the country’s current economic position.
Italy’s exchange rates are expected to rise in the near future and allow for a steady return after this recent recession. The Italian government is actively promoting themselves in the global market (D'Ambrosio, & Rohde, 2014). Welcome to Italy! markets the country’s gourmet food and drinks in an effort to stir up global interest for the country’s fine exports. One of the marketing programs implemented by the Italian government leverages a three-day event in Chicago to showcase authentic Italian cuisine (Hoppe, 2015). The marketing program leverages the current exchange rate while also promoting future export and tourism ventures.
With over sixteen square miles Russia is the largest country in the world (Gillis, & Aliprandini, 2014). Russia is currently experiencing financial stress as the GDP declined 4% in the last year ('Emerging Europe Monitor: Russia & CIS' 2015). The value of the Russian Rubble has disintegrated causing havoc in the marketplace (Rodionov, Pshenichnikov and Zherebov, 2015).
GDP Growth Rate
Though Russia’s economy has recently stumbled the country’s unemployment rate continues to drop.
(Database of the Central Bank of Russia, 2015)
General government balances % of GDP
Balance of Payments % of GDP
US Dollar / Russian Rubble (Database of the Central Bank of Russia, 2015)
Though the value of the rubble has previously fallen, the current exchange rate is catastrophic. The situation is dire as the global market continues to conduct business while the Russian dollar is almost worthless in exchange. International lenders and investors are confused; their confidence in Russian business is clouded. Potential foreign business partners are also confused by the situation. The situation creates a cloud of uncertainty in the global marketplace (Rodionov, Pshenichnikov and Zherebov, 2015).
Analysis of the Monetary/Fiscal Policy
Russia utilizes a separate state monetary policy. The country’s fiscal policy is under the direct control of the Russian government and the Bank of Russia. The primary goal of the country’s fiscal policy is to minimize inflation and stabilize pricing. Russia’s primary fiscal goal is to “reduce inflation by 4% by 2017” then to maintain that set curb of inflation (Central Bank of Russia, The, 2015).
The individual approach Russia utilizes to govern their fiscal policy gives the government a great deal of control over their fiscal policy however it also produces a lot of risks and deterrence towards global trade. The current policy implements a ‘floating exchange rate’ (Central Bank of Russia, The, 2015). The value of the Russian rubble is determined by the global market. The current position of the global market sets a minimalistic value to the rubble. The goal of the floating exchange rate was to promote long-term trade partners and encourage stable pricing (Central Bank of Russia, The, 2015).
Analysis of the Foreign Trade Agreements and Exchange Rates
Russia is experiencing a great deal of isolation in the global market. The current foreign trade situation Russia is experiencing is dire. The rubble has fallen tremendously as prices have risen.
The effects of Russia’s current military position are twofold. Propelling the Russian recession are the sanctions of the United States and the European Union (Ashford, 2016). The two powerhouses of global trade are using trade sanctions to persuade Russia to stop the fighting in Ukraine and surrender Crimea. The sanctions are prolonged until 2016. The low value of the rubble is compounded by the lack of international trade partners and the high cost of maintaining the current military position (Country Monitor, 2015). The low price of oil further complicates the country’s financial scenario (Dreger, & Kholodilin, 2015).
Russia is facing an economic crisis. The US and EU trade sanctions have nearly eliminated Russia’s foreign trade options. In the global marketplace, Russia is nearly isolated. The value of the rubble has crumbled.
P&G uses a localized approach in the countries they operate. The company individualizes their operations to reflect the local needs of their hosts. Both Italy and Russia are currently experiencing a recession. Both countries are in need of the many jobs P&G offers. The company leverages local manufacturing sites to minimize the costs of distribution and to support the local economies where they conduct business.
P&G takes pride in their commitment to “improve the lives of their consumers” (P&G, 2016). While Russia is currently facing trade sanctions and a bleak foreign trade environment P&G continue to support the needs of their consumers by providing jobs and producing household products. More than half of the consumer goods sold by P&G in Russia are locally produced (Logendran, 2015). The company is making similar contributions to the Italian economy. The jobs created at the P&G production sites stimulate the local economy. Meanwhile, producing a large portion of their products reduces the costs of distribution. The company is also very much committed towards their charitable endeavors.
Italy and Russia share many macro-economic factors. Both countries are experiencing a recession. Both countries are highly affected by the low gas prices. However, the major difference between the two nations are the sanctions posed on Russia’s trade endeavors’ and Italy’s support from the European Union and their strong relationship with the United States. P&G takes on a natural approach and provides support to their consumers in both Italy and in Russia.
P&G markets and distributes dish soap and other detergents in Italy under the brand name ‘Dash” (Dash.it, 2016). A major distributor of Dash in Italy is the Carrefour Market’s. The superstores flyer for the period of February 9 – 14 features an ad promoting Dash dish detergent. The promotion is for 2 packages of Dash dish detergent tabs for the price of 15.01 euros (Carrefour.fr, 2016). Using the current exchange rate valid for the period of the promotion the Italian superstore is promoting the sale of 2 packages of Dash dish detergent tabs for the value of $16.75 US. Meanwhile, in Russia P&G sells dish detergent under the brand name Fairy and Clever. One major distributor in Russia is the Billa hypermarket. Fairy is a more value priced and economic brand, but the Clever line of products are comparable to the Dash line of dish detergent tabs sold in Italy. One package of Clever dish tabs is priced at 4.99 Euro’s (Billa, 2016). The current value of the promotion can be converted to $5.57 US. There are two major considerations to make when comparing the two dish soap advertisements. The obviously higher price for dish soap in Italy and the Russian flyer using Euro’s to price products.
Dish soap only represents one product in P&G’s vast product lines. The global household product industry grew by over three present in 2014 to reach a value of almost $185 billion US (MarketLine, 2015). The largest geographical segment of household products sales are Asia Pacific (34%), followed by Europe (33%) then the America’s. In the vast global market P&G is the leading producer of household products (14%) followed by their leading competitor Unilever (7%) (MarketLine, 2015). In Italy, the total value of the household product industry climbed by 1.6 % to reach a value over seven billion dollars US in 2012 (MarketLine 2014). In Italy the leading producer of household products is Henkel AG & Co. KGaA with almost 17% of the market, followed by P&G holding just under 13% of the market. While in Russia, the household product industry grew by a little over three percent and has reached a value of three billion dollars US (MarketLine, 2015). The Russian share of the European household product industry is only 5.5% less than half of Italy 12.5% of the industry (MarketLine, 2014/2015). However, P&G is Russia’s leading producer of household products and holds just under 23% of the market. While their leading competitor in Russia is Henkel who produced just under 14% of the household products purchased by Russian consumers (MarketLine, 2015).
The industry of household product manufacturing is similar in both countries. The industry has four major companies who produce the majority of the household products. Those major companies have the advantage of customer trust and loyalty, economic manufacturing facilities and massive marketing budgets. While the majority of the products sold by those four major producers (Procter & Gamble, Henkel, Unilever and Reckitt Benckiser) are purchased by a few major customers – the major hyper stores supercenters. The industry of household products is mainly controlled between the rivalry between the four major producers and the buying power of the few major distributors (MarketLine, 2015).
P&G has active operations in both Italy and Russia. P&G’s long history of success started in Cincinnati, Ohio in 1837. The company’s incredible success in the US began to flood overseas. In 1956, P&G launched their Italian headquarters in Rome as a team of five staff soon began marketing Camay and Spic and Span (Procter & Gamble Italy [P&G], 2016). The company’s operation in Italy continues to operate their Italian headquarters in Rome but has grown to employ 3,000 employees (P&G, 2016). P&G now markets 40 of their products in the Italian marketplace (P&G, 2016). Italy also hosts three of P&G’s manufacturing facilities. In Pomezia, P&G has a site manufacturing laundry soap (P&G, 2016). In Campochiaro, the company manufactures Ace Bleach (P&G, 2016). Finally in Gattatico, P&G produces dish detergent that they market for cleaning the home (P&G, 2016). While in Castiglione delle Stiviere, P&G has established a distribution center for the Wella product line.
It was much later that P&G began its expansion to Russia. In 1991, P&G launched its first Russian representative office (P&G, 2016). The company’s Russian expansion exploded with success quickly becoming the fastest growing expansion of P&G. The company’s Russian operation operates out of their Moscow head office along with four regional offices. P&G’s also conducts product manufacturing in three Russian locations (P&G, 2016). The company boasts about its commitment to local production. More than half of the P&G products sold in Russia are manufactured locally. The Novomoskovsk production facility manufactures detergents along with Pampers diapers (P&G, 2016). While the manufacturing site located in Dzerzhinsk produces two complete lines of hair care products (P&G, 2016). Finally, the St. Petersburg facility produces multiple lines of Gillette razors and razor accessories (P&G, 2016). P&G employees over four thousand employees throughout their Russian operations, while another fourteen thousand jobs are created by the company’s suppliers, finally ten thousand Russian jobs are created by the company’s product distribution chain (P&G, 2016). P&G also contributes a lot of tax dollars to the Russian government.
Italy and Russia have two highly contrasting economies similar to the global market the company operates within the competitive environment in both areas is best described as competitive. While Russia has experienced extreme shifts in their GDP, Italy’s GDP’s fluctuation is more subtle.
Russia and Italy GDP Contrast (International Monetary Fund, 2016)
Bubble Map Highlighting Italy and Russia (IMF Data Mapper, 2016)
The above chart demonstrates the similar population size and GDP shared by Italy and Russia. Both countries are relatively highly populated with a somewhat highly developed economy. Though Russia has a higher population, Russia’s land mass is dramatically larger than Italy’s.
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