Question A

Soapy Soap Company is a highly successful in various urban and rural markets within the U.S. It sells various types of bath soaps through large and small retailers. However, given market maturity and other factors, the company has seen only stagnant growth over the last decade. The CEO of the company is now interested in pursuing opportunities in China given its large market size (about 1.4 billion consumers and thus, potential users of soap).

The company sells it soaps at an average price of $0.50 to various wholesalers who in turn sell to retailers and thus, to consumers. On the average, a consumer in the domestic market pays $1 for a bar of soap. In China, however, the company would have to go through an importer. Beyond the importer the distribution chain would consist of distributors, wholesalers, semi-wholesalers and then retailers, before the product reaches the consumer. Also, the costs of transportation and importation (e.g., duties) are to be included in the price at which the product is sold to the importer. The relevant costs and markups (in percentages) are:

Costs of Transportation and Importation 10%
Importer Markup 5%
Distributor Markup 5%
Wholesaler Markup 5%
Semi-wholesaler Markup 10%
Retailer Markup 50%

1. What would be the average retail price of the soap in China?

2. Given the various modes of international market entry, which mode would be most appropriate for this company? Elaborate.

[Hint: The average price of the product after transportation and importation is $0.55. Since the importer's markup is 5%, the product is sold to the distributor at $0.58 ($0.55 x 1.05). Similar calculations can be made down the chain.]