International Business Simulation: BUYING Cinnamon from India

As a small business owner, you are an export merchant operating out of Monterey CA, doing business as Central Coast Foodie International. You specialize in importing and exporting foodstuff worldwide.

Cinnamon is one of the oldest and most valuable traded spices in the world. It is believed that Cinnamon is native of Sri Lanka (formerly known as Ceylon). The bark of the cinnamon tree rolls up while drying in the sun, and forms what we know as a cinnamon stick, which is used in this form or ground into a fine powder. For aromatherapy and other medicinal purposes, oil is made from the bark or the leaves. A related but less-expensive oil is made from the Chinese cassia plant. There are several native variations of the cinnamon tree (Sri Lanka Verum, Indonesia Burmannii, Vietnamese Loureiroi, Chinese Cassia). Overall, Sri Lankan Verum cinnamon is considered the best: it is more aromatic, subtle, and less allergenic (lower levels of toxic coumarin) than Chinese Cassia cinnamon. For these reasons, Sri Lankan cinnamon is more expensive than the Chinese cinnamon. As with all spices, there are various grades of quality, depending on provenance, production methods (e.g. organic or conventional), and most importantly freshness, as spices are perishable. Cinnamon is no exception, being at its peak for the first 3 weeks, and then very gradually losing flavor and nutrients.

Egyptians imported cinnamon from China and used it as a medicine and food enhancer. Since then it has been used in many food recipes across the world, from infant formula and curries in India to cinnamon pastries in the USA and Nordic Europe, to Mexican hot chocolate.

Global annual production of cinnamons totals 27,500-35,000 tons. The main producers are Indonesia, Sri Lanka and China. Smaller volume producers include Seychelles, Madagascar, India and Vietnam.

You are on a scouting tour of Southern India, looking for new food and spice supplies to buy and import back to the USA, in order to sell them to your US business clients. You are about to meet with MT Govindaluri, a foodstuff wholesaler in Madras from whom you have purchased orders many times before. He contacted you with a proposal that "you should not pass". MT says (s)he has secured 500 pounds of top-grade organic Sri Lankan Verum cinnamon in the form of individually sealed-wrapped sticks. They are at their peak of freshness now, but will only remain so for a little over two weeks. As you know, any delay passed their prime would gradually reduce their retail value over the next two years, at which point they would be worthless.

Like the true professional that you are, you have not wasted any minute. After doing some preliminary research, the most typical wholesale price in India for cinnamon seems to be at least 250 Rupees per pound. But this is for conventionally farmed cinnamon (as opposed to organic) of average quality grade, which is not the case of the present shipment. It is hard to tell what the appropriate price should be because this level of quality is very very rare, and cinnamon prices vary every day, based on supply and demand worldwide. Looking up trade leads on the Internet today, the highest price you have encountered locally appears to be R500 per pound for some good stuff, but its hard to tell whether the quality compares with this shipment or not. MT sounded like this shipment is of truly exceptional quality. If so, its value might be higher than R500, possibly as high as 700, maybe more??

You have also researched shipping cost. Airfreight must be arranged in order to ensure express delivery to whoever will buy cinnamon from you in the USA. If shipped from India with 3-5 business day guaranteed delivery to a US location, your shipping cost would be around $4K for a 500-pound shipment or $3K for a 250-pound shipment, which is very expensive, but can't be helped if you want to maintain maximum freshness. The good news is that cinnamon can be imported from India into the USA duty free sweet!

Youve also started looking for a potential buyer of this shipment in the USA. Small retailers typically sell organic premium cinnamon sticks to final customers for $50 a pound minimum, but these retailers only buy small quantities from a wholesaler such as you, so you would have to find dozens and dozens of small retailers to sell the 500 pounds if you went that route. Possible in theory, but very time consuming, and the product would lose some its value as time flies... Given that you are a one-person business, this seems impractical.

More promising is your buddy at this San Diego chocolate company who makes powdered Mexican chocolate mixes. He said he might be interested in buying as much as half of this shipment (so up to 250 pounds). He said that, assuming exceptional quality which would have to be verified, $23 per pound was a reasonable price for him to pay to you. So you reckon after some back-and-forth with him you could probably settle on a slightly higher selling price to him, but you can use $23 per pound to conservatively estimate your profits. You have sold him lower-quality organic cinnamon in the past for $15 per pound, so MT's shipment could generate an unusually high profit margin for you.

Back over in India, you are going to meet with MT in a few hours to discuss the cinnamon purchase end of the deal. Last time you met MT in India was 4 months ago. After a very good deal you closed together you went out to celebrate with a couple of her/his employees, and being a nice host, MT paid for the whole dinner. Now you now need to finish preparing for the negotiation. You expect the price negotiation to be in Rupees per pound as usual. Today, one USD is worth Indian Rupee (INR) 77.

NOTE: In order to avoid confusion, please base your decisions on the data provided in the case. Please avoid making personal assumptions not mentioned in the case.

Answer the following question:

1. Guesstimated ZOPA: Show your calculations:
2. Target outcome (price, in INR):
3. The amount of cinnamon you plan to buy: _______________________________pounds
4. Other conditions of the agreement (e.g. INCOTERMS used, required delivery time, method of payment, etc.):
5. Assume that you and seller agreed on a price of INR 720/pound:

a.What would be your net gain total (in USD) from this deal? Show your calculations:

b.Are you satisfied with this agreement? (Justify why or why not?)