Brief Synopsis of the Issue
This proposal is informed by the expressed need for Primark, a British-owned, Irish clothing retailer, to enter into the Brazilian market as part of the firm’s internalisation orientation.
The strategic proactive decision to compete in the Brazilian market arises out of the firm’s deliberate policy to exploit foreign market potential and growth, diversify markets through opportunistic global market development, and follow customers abroad to entrench customer satisfaction (Agergaard 2010).
Primark stands to gain competitively and strategically through the application of this market entry proposal to market its products in Brazil.
- Primark should develop and implement a strong brand image to successfully compete with other established apparel stores operating in Brazil, such as Zara and Mango;
- Primark should use the vast knowledge and experience gained in expanding its operations into markets considered as physically close (European markets) to successfully internationalise its operations in Brazil;
- Primark should consider establishing an apparel factory in Brazil to cut down on logistics costs involved in transporting products from far-away Asian countries into the Brazilian market; and
- Primark should enter into the Brazilian market by establishing a wholly owned subsidiary through the acquisition of already existing firms.
Although Primark’s main headquarters are in Dublin, Ireland, it is evident that the firm’s entry into other European markets (e.g., Austria, Belgium, France, Germany, Portugal, Spain, Netherlands and the United Kingdom) has successfully positioned it as a reputable seller of fashionable clothes at the low cost end of the market.
In all these markets, the entry mode has always been through acquisitions or direct foreign investments. However, the Brazilian market presents new challenges that warrant comprehensive analysis, particularly in light of the market’s geographic proximity, cultural and social issues in Brazil, as well as political and regulatory frameworks.
Extant literature demonstrates that although Brazil has one of the largest commodity stocks and a high population with a quickly mounting purchasing power for consumer products and services, it nevertheless has a high tax regime and a bureaucracy that necessitates much patience on the part of firms wishing to enter the country’s markets (Agergaard 2010).
It is important to note that this is Primark’s second attempt to enter international markets outside of the confines of the European Union after successfully entering the United States market, hence the need for careful analysis and evaluation.
The remainder of this market entry proposal is organised as follows: first, a concise analysis of market opportunities (country-level analysis) is provided. An analysis of Brazil’s attractiveness (risks, costs, benefits) is then provided, followed by a concise situation analysis of Primark using the SWOT analysis framework. In the following section, an analysis of the firm’s readiness to enter the Brazilian market is undertaken.
Afterwards, issues of global sourcing, production and logistics are assessed, followed by a critical analysis of the firm’s market entry strategy, along with a discussion on the strengths and weaknesses of the proposed entry mode.
In the final section, a step-by-step approach to the implementation of the proposed strategy is discussed, followed by an analysis of the benefits and potential barriers to successful implementation and evaluation of the market entry strategy.
Analysis of Market Opportunities in Brazil (Country-Level Analysis)
The choice of which country to enter is of immense importance to the internalising firm, and requires considerable deliberation and analysis on the market opportunities existing in the country and if such opportunities will lead to a firm’s competitive advantage (Douglas & Craig 2011).
A framework comprising four main areas, namely competitive intensity, customer dynamics, technological vulnerability and microeconomics (Cunill, Forteza, & Gil-Lafuente 2013), is used to determine the type and magnitude of country-level market opportunities. The results of the analysis are as follows:
This dimension deals with the number of competitors in the country as well as their strengths and weaknesses (Cunill et al 2013).With a GDP of USD 1.574 trillion in 2009 (International Monetary Fund 2010), Brazil is one of the fastest growing economies in the world; however, the country is yet to attract many global retailers in the apparel industry, hence the competitive intensity is low.
Zara, Mango and the British street starwart C&A are the early entrants into the Brazilian apparel industry, hence their brands may be popular in the country (Thomson, 2012). However, these retailers deal with the high-end consumer market, implying that Primark still has the capacity to successfully position itself as a reputable seller of fashionable clothes at the low cost end of the market.
This dimension deals with unconstrained opportunity for customers, segment interaction, and rate of customer growth (Cunill et al 2013). The economic outlook of Brazil can be described as healthy, thus customers are likely to feel more confident in shopping for clothes beyond their basic necessities due to their strong purchasing power.
With the mounting economic fortunes, Brazil is expected to maintain a strong rate of customer growth and customers are likely to spend more money to satisfy particular lifestyles, needs and personalities (Lee 2014).
This dimension deals with technology adoption as well as the impact of new technologies (Cunill et al 2013). Brazil is a leader in technology adoption and use in South America (Agergaard 2010), hence it is expected that the costs for technology adoption and use will be low.
This dimension deals with the market size and profitability of the market in a particular market (Cunill et al 2013).
In light of the fact that Brazil is by far the most populous country in South America and the tenth largest economy in the world by GDP analysis (Agergaard 2010), it is estimated that there is a huge market for the apparel industry and an equally profitable market due to high consumer purchasing power and low entry of foreign apparel retailers into the Brazilian market.
Country Attractiveness (Risks, Costs, Benefits)
Brazil is a politically stable and democratic country with a diverse climatic environment that is favourable for the sale of a multiplicity of clothing designs, ranging from bikinis to cold wear. Brazil is not in danger of any political or military upheaval which may shift the country’s economic rules and regulations overnight, implying that political and economic risks in the country are low and favourable for investing.
However, the cost of doing business in Brazil is high due to a burdensome tax regime and bureaucratic red tape (Agergaard 2010).
The benefits of internalising into the Brazilian market include (1) a huge market size for clothes, (2) a customer base with high purchasing power due to the favourable economic outlook, (4) well established infrastructural and technological expertise, and (5) minimal entry of foreign-based apparel retailers into the Brazilian market (International Monetary Fund 2010; Thomson, 2012).
Company Situation Analysis (Firm-Level Analysis)
Primark’s situation analysis demonstrates that its present business strategy of offering value and low prices is working to provide the firm with a strong financial position due to the attainment of high sales volumes coupled with lower retail margins (Primark n.d.). A strong financial position is critical in the internalisation process (Ekeledo & Sivakumar 2004; Chiao et al 2010).
The firm’s prices and costs remain competitive in line with its business model; however, it needs to develop and implement strategies aimed at not only maintaining a strong competitive position but also addressing several strategic issues facing the company, such as the maintenance of low cost, supply chain challenges in product sourcing, and high competition from quality competitors like Peacock and Matalan (Ross & Harradine 2010).
The SWOT (strengths, weaknesses, opportunities, threats) framework is used to undertake Primark’s situation analysis, with results indicated as follows:
Primark’s strengths include a strong market presence (almost 200 stores across Ireland, the United Kingdom, Spain, Netherlands, Germany, Belgium and Portugal), strong financial base witnessed by its high annual turnover, customer loyalty due to unique product offerings, employee participation, innovative clothing lines, and strong commitment to ethical operations and effective governance (Ross & Harradine 2010).
The firm’s strong financial base, innovative clothing lines and customer loyalty are critical to the successful entry into the Brazilian market.
The weaknesses of Primark include brand imitation by companies offering similar products, lack of a strong brand image and recognition, and lack of advertising due to the low-cost business model (Rowley 2009). The competitive intensity and customer dynamics in Brazil demands that Primark develops a strong brand image to successfully compete with other established apparel stores such as Zara and Mango.
The firm’s opportunities lie in diversifying its products, increasing its market size, and increasing the use of technology to reach more customers in diversified geographic markets (Rowley 2009).
Increasing market share is one of the driving forces of a firm’s internalisation strategy (Ahsan & Musteen 2011), hence Primark is bound to gain from its entry into the Brazilian market as customers in the country have a high purchasing power and are likely to spend more to satisfy particular lifestyles (Agergaard 2010).
Primark’s threats include strong competition, presence of cheaper apparel stores, rapid and constant shifts in fashion, as well as lack of consumer spending power in some of its European markets (Ross & Harradine 2010).
While Primark may have to develop strategies aimed at effectively competing with other international and local apparel stores in Brazil, it will nevertheless benefit immensely from the high spending power of Brazilian customers.
Readiness to go Overseas
From the analysis, it is evident that Primark is ready to enter into the Brazilian market, particularly in light of its strong financial base, customer loyalty, unique product offerings in diversified markets, and propensity to increase market size. The firm has a strong presence in several countries across Europe, implying that it has the necessary experiential knowledge needed in internalising its operations in distant countries such as Brazil.
This is in line with the Upsalla Model of Internationalisation, which postulates that “firms develop their activities abroad over time and in an incremental fashion, based on their knowledge development” (Whitelock 2002, p. 342).
Primark has already expanded its operations to markets considered as physically close to its headquarters in Dublin, implying that it can use the knowledge developed to expand into markets considered as distant.
Global Sourcing, Production & Logistics
The firm will continue to source clothes from low-cost countries such as India, China, Bangladesh and Turkey, while aligning its sourcing strategy with its business strategy of providing customers with ethically sourced garments (Primark n.d.).
Owing to the vast natural resources found in Brazil, including cotton and silk, Primark should also consider establishing a comprehensive supply chain with local suppliers for cheap raw materials. Such an arrangement would require the firm to construct its own factory in Brazil, an endeavour that may be costly in the short-term due to the high tax regime and bureaucratic red tape (Agergaard 2010).
However, Primark stands to benefit in the long-term due to reduced costs of transporting products by air and sea from far-away source countries in Asia into the Brazilian market. The company should continue to employ lean production and efficient operational practices with the view to realising its objective of satisfying the low end market spectrum with high quality fashion products (Ross & Harradine 2010).
Market Entry Strategy
International market entry scholarship demonstrates the existence of several entry modes which are basically divided into two categorisations, namely equity and nonequity entry modes.
Equity entry modes include joint ventures and wholly owned subsidiaries (e.g., Greenfield investments, whereas nonequity entry modes are basically exports and contractual agreements that include licensing, franchising, turnkey projects, as well as R&D contracts (Ekeledo & Sivakumar 2004; Murray, Ju, & Gao 2012).
The recommended entry mode choice for Primark into the Brazilian market is by establishing a wholly owned subsidiary through the acquisition of already existing firms. Primark is presently in a strong financial position due to the attainment of high sales volumes in its foreign operations mostly in Europe (Ross & Harradine 2010).
The firm should use this strength to commit adequate resources to undertake a direct establishment in the Brazilian market. Another justification is based on the fact that the firm has developed adequate knowledge in conducting acquisitions in European markets and should therefore use this knowledge to establish a wholly owned subsidiary in Brazil.
The strengths of the proposed entry mode include (1) capacity to enable the parent company take control of the supply chain of established subsidiaries through vertical integration, (2) capacity to diversify and manage risk, and (3) opportunity for Primark to negotiate better tax terms with the Brazilian government (Chiao et al 2010).
However, wholly owned subsidiaries may actually result in more taxes due to the employment of separate business entities, not mentioning that diversification can cause the parent company to lose focus on what it does best (Chiao et al 2010).
Implementation of Market Entry Strategy, Benefits & Barriers
The steps to be used in implementing the proposed market entry strategy include:
- developing and implementing an acquisition strategy in line with the firm’s low cost business strategy,
- identify suitable targets in Brazil based on the firm’s strategy,
- begin discussions with potential targets,
- arrange for a business valuation of the preferred target,
- secure the needed financing to acquire the target,
- conduct due diligence,
- negotiate, structure, and close the deal,
- plan and implement a post-acquisition strategy (Whitelock & Rees 2003).
Lastly, the benefits to successful implementation of the proposed market entry strategy for Primark include increase in sales revenues, increase in customer base due to the firm’s low price strategy, high returns to the firm’s shareholders, and ability to communicate and fully control the enterprise (Ahsan & Musteen 2011; Cunill et al 2013).
However, barriers may present in terms of experiencing challenges in repatriating earnings, exposure to high risks due to great commitment in capital and managerial effort, as well as cultural challenges in the host country.
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