Professional Documents
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MSc Management
International Business
Overview
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Target group
The prime target market that has been identified is the middle and low-income
class under 35 interested in fashion trends at bargain prices. According to a
McKinsey survey on China's urban young adults (a segment of about 15
million people), half perceive foreign brands to be of higher quality than local
brands. Similarly, 36 percent of China's young adults say they like to try out
foreign products and brands on a regular basis. They also shop for apparel
more frequently people in other age groups spending larger sums on clothing
and are likely to spend even more as their incomes rise [1].
Mode of entry
As labour costs are relatively low in China, Primark will set up ‘Green Field’
operations rather than establishing a presence through M&A. According to
the Ministry of Commerce, the most common ways of entry for foreign
enterprises into China are Equity Joint Ventures (EJVs), Contractual Joint
Ventures (CJVs) and the establishment of Wholly Foreign Owned Enterprises
(WFOEs). We suggest that Primark chooses the WFOE as its mode of entry.
Strategy in-depth
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Production and design
On average, it currently takes six weeks from the design table until a
product is in the shops.[2] We would seek to reduce the product release-time
down to three weeks for the Chinese market; given that manufacturers would
be in closer range to the distribution centres than before, this would
immensely improve Primark’s competitiveness. Additionally, product sizes
would need to be adapted to ensure they meet the requirements of Chinese
consumers.
Primark makes its profit primarily by selling its products at low prices but in
high volumes. In order to achieve a high stock turnover in China, the supply
and distribution of goods needs to be secure, fast and efficient. We propose
to set up two large distribution centres in China which will be used to stock,
process, and supply goods to the retail stores.
Naturally, the location of the Primark retail stores will be of great importance in
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creating brand awareness and addressing the appropriate target market. We
propose to set up Primark flagship stores on high streets and shopping malls
which are frequented by young workers and students in first-tier cities like
Shanghai, Beijing and Guangzhou. In addition, we suggest opening a further
flagship store in Hong Kong. In a second stage, we plan to expand the
physical stores of Primark to second-tier cities with high household living
expenditure per capital like Zhejiang, Jiangsu, Fujian, Guangdong, and
Tianjin.
Human Resources
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Primark will employ people from local communities to work in its stores and
distribution centres in China. This will both reduce employment costs and
ensure employees have a good connection with consumers. Training staff
with the help of training consultants, who are fluent in Mandarin and have a
significant amount of retail experience in Europe, will be major priority for
Primark.
Marketing
At the initial stage of entry to the Chinese market, we plan to invest in local
marketing efforts, even though this is contrary to Primark’s UK strategy.
Unlike foreign retailers like Zara or H&M which were widely known before
entering the Chinese market, the brand awareness for Primark is relatively
low. Adverts should be placed in local fashion magazines, billboards and
‘Metro’ newspaper to create and then raise brand awareness. Further
emphasis will be put on the shops’ window displays.
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Online store
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Figure 2: Total amount of consumption through Internet shopping in 2005-08
(Source: DCCI, 2008)
From the above figures, we can see that fashion e-commerce is a fast
growing market with room for future investments. With the increasing number
of people in china choosing to shop online, the market holds a huge potential
for companies like Primark.
Taobao China
For the first half of 2009, Tabao’s transaction volume is reported to be RMB
80.9 billion (US $11.8 billion) which is 97% increase from last year. [3] Many
well-known Chinese domestic brands, but also foreign brands like Dell,
Lenovo, Procter & Gamble and Uniqlo sell their products through online
shopping platforms like Taobao Mall. In July 2009, the official Lenovo online
store was earned more than RMB 10 million, in one month only.[4]
To launch an online store through Taobao greatly reduces the initial costs
and risks in contrast to setting up an own online store.
We believe that online retailing in this form will benefit the company in two
ways: On the one hand, it will help the company to reach customers in all
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parts of the country without setting up costly stores. On the other hand, it will
serve as a database for Primark helping to understand customer behaviour
and preferences of its new Chinese customers.
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Strategy timeline
This report assumes a five-year time line for the outlined expansion plan. The
table below shows a breakdown of goals to be implemented within this
timeframe.
China has a nominal GDP of US$ 4.4 trillion (2008) and has had the fastest-
growing major economy over the past 30 years with an average annual GDP
growth rate above 10%. According to research centre of the State Council of
China, an average 7.9% GDP growth can be expected between 2001 and
2010.[6] Making it an ideal destination for many multinational companies.
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Growing middle class
China accounts for 37.8% of the entire Asia-Pacific apparel retail industry’s
value. The Chinese apparel retail industry grew by 5% in 2008 reaching a
value of $84.9 billion. In 2013, the Chinese apparel retail industry is forecast
to have a value of $106.2 billion, an increase of 25% since 2008.[8]
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Five Forces of apparel industry
Bargaining power of suppliers The current suppliers (wholesalers and manufacturers) are
quite fragmented which weakens the bargaining power of
supplier. Low
Bargaining power of buyers Almost all the buyers are individual consumers and the
fragments consumers as style is an abstract concept that
defines individuals, to an extent, an extension of personality
and therefore highly individualized, which significantly
weakens buyer power. Low
New entrants Entry to the apparel retail industry does not require large
capital outlay; setting up an independent apparel retail store
is within the means of many individuals. High
Substitutes Substitutes for apparel retail include buying direct from
manufacturers; with increasing online purchasing. Other
substitutes include home-made and custom-made (couture)
clothing. Overall Moderate
Competitive rivalry The competition in the current apparel market is becoming
fierce among both domestic retailers and foreign retailers.
Selected key competitors
Domestic brands:
The top two competitors are
Foreign brands:
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Zara H&M Uniqlo
Year of 2006 2007 2002
entry
No of 35 15 46
stores in (until October (until Sep (until October
China
2009[9]) 2009 [10]) 2009[11])
From the Five Forces analysis, the apparel industry is an attractive industry to invest in with low
bargaining powers for both suppliers and buyers. However, as a new player in the market,
attention must be paid especially to differentiation from competitors.
Manufacturing Expertise
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Political factors
The Chinese retail and distribution sectors have been the last ones to be
deregulated. Modern retail trade did not emerge from under the central
planning system until the middle of the 1990s. Foreign access to the
domestic markets was only granted gradually and many areas domestic
retailers still dominate; many of them with government support.[12]
Economic factors
Despite the political and structural restraints foreign investors are faced with in
China’s retail sector, the general environment for investment is positive and
optimistic against a background of substantial growth over the past years in all
retail formats and sectors. The Chinese GDP has grown 13.7% between
2002 and 2007 and 35 of the world’s Top 50 retailers are now represented in
China. [16][17]
Yet, in spite of a steady and steep economic growth rate, there are some
signs for caution; foreign investors need to bear in mind in order to be able to
understand the dynamics in the Chinese market. Growth is evident, but
where does it come from? In the retail sector, growth mainly seems to stem
from new stores with a consumer price inflation of 5.9% (UK: 4%) and private
consumption making up only for 35% of the GDP. The average in other Asian
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countries lies between 50-60%. The government has now realised this
situation could need some encouragement and has begun to devise some
incentives to boost private household consumption. [18]
The Chinese retail market is vast and complex and, therefore, bears a
multitude of opportunities for investors, but also risks. Its only recent
deregulation and the aforementioned aspects are very likely to be the reasons
why, despite ongoing growth, only 2.6% of total retail sales came from foreign
invested retail operations in 2006 and why exports from the US and Europe
have remained flat in the past year.[19]
In the fashion retail market, the inflow of foreign capital into Mainland
China is a rather recent phenomenon, but, nevertheless, a growing one.
National domestic chains have only started to emerge in the last couple of
years, while, at the same time other foreign fashion retailers have begun
creating a national footprint. Esprit was among the first and now has over 280
concessions throughout China. Giordano, Bossini and Baleno have
successfully expanded from Hong Kong into Mainland China clearly
benefitting from existing joint ventures and some level of brand awareness. [20]
The Japanese chain Uniqlo, after a patchy start in 2002, is now reporting
steady revenue growth. European chain Zara opened their first Shanghai
flagship store in Shanghai in 2004, while H&M now owns thirteen shops since
first opening their doors to Chinese customers in 2007. All of the above are
planning on opening further outlets in the near future. Foreign retailers like the
above, tend to produce locally. Their goods are generally perceived to be of
high quality and pricey in comparison.[21]
Socio-cultural factors
Continuing urbanisation and the liberalisation of the markets have led to the
emergence of an urban middle class of increasingly sophisticated consumers
demanding higher quality, variety and innovation from their retailers. The
number of households with an annual income of over US$5,000 has now
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reached 150 million. Growth has been uneven among different geographic
regions as well as rural and urban areas. Eastern coastal regions
demonstrate better overall economic performance with average household
incomes rising and above the national average. In addition, the past couple of
years have seen a significant rise in households’ disposable incomes.
Chinese consumers tend to have more of a taste for variety and many firms
have found it profitable to extend their ranges according to local tastes.[22] [23]
The expansion of the retail market has led to a shift in focus on the
customer experience and the retail environment: High-end shopping malls are
being built in first and second tier cities across the country as a response to
the fierce competition for good retail space which has driven to unrealistic
heights given the rate of new developments being created; this is particularly
true for cities like Shanghai and Beijing. The opening of the market has given
Chinese customers a profile and retailers are responding to it. As the broad
demand for established brands like Apple and Levi Strauss (which are sold in
China at higher prices than anywhere else) reflects, the acceptance of
Western goods is universal.[24]
Technological factors
Successful foreign firms, in general, tend to have invested a lot of time and
resources into building a functioning distribution network and raising
awareness for their products.
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advantage.[25]
Environmental factors
Legal factors
Since 2002, most regulations in retail sector have been lifted. It is now
possible to establish wholly owned enterprises rather than just joint ventures,
which has resulted in growing confidence among foreign retailers.
18
Why invest in Primark?
Primark’s growth
The value retail industry has seen a huge rise in the UK retail market over the
past 5 years with Primark at the helm of this rise. [28] Primark’s sales
performance has been exceptionally good with revenues rising from £1,933
billion in 2008 to £2,314 billion in 2009.[29] This is an excellent achievement
especially when the current recession’s adverse effect on other retail chains is
taken into account. Primark’s financial growth shows that its trading
philosophy of selling quality products at low prices is immune to economic
instability, appeals to spending conscious consumers and will serve as a great
advantage when expanding into the Chinese market.
Fig1: Number of Primark stores trading [30] Fig 2: Primark’s financial growth from 2005
-2009 [31]
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China. Assessing the risks, we consider China to be a friendly place for
European retailers, something that is also evident from the performance of
other European retailers in China. In addition, our plan to become the first
European retailer to launch Internet sales in China’s fast growing e-commerce
sector, makes Primark’s investments prospects even better.
A corporate vehicle will be used, Primark China Ltd, where the investor
will become a preferential shareholder and not a creditor. This will follow the
basic Islamic Finance model, based on profit sharing and not the receivership
of interest rates.
Preferential shares in the company will carry a fixed dividend rate, over
and above the current market interest rate. The initial capital of one billion US
Dollars will be used for contracting out more manufacturers, setting up an
efficient distribution network and leasing and equipping the first stores. All
assets will be assets of the company, creating security for the investment.
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In summary, we consider this to be a great investment opportunity for a
Middle Eastern investor due to the flexible terms offered. The investor will be
able to secure an initial payback over the market interest rate, while
eventually he will have the opportunity to gain from the overall operations and
growth of Primark in China.
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References
[1] China: Small Budgets, Small Wardrobes. The McKinsey Quarterly, 2007, P70.
[2] Gelb, Mallary (Dec 2, 2005) Primark – King of no-frills fashion [Online] Available at
http://news.bbc.co.uk/1/hi/business/4466986.stm [Accessed on Nov 30, 2009]
[3] [4] [5] Business Wire (2009) Taobao sees significant new trends in Chinese online
consumption [Online] Available at http://www.allbusiness.com/company-activities-
managment/operations-supply/12703131-1.html [Accessed on Nov 20,2009]
[6] http://en.wikipedia.org/wiki/People's_Republic_of_China
[7] Ho, Filfreo. Importing, Exporting and Investing in China. Asian Supply Chain. March
2007.
[12] [16] [20] [18] [22] [24] [25] PWC (2006) Investing in China’s Retail Industry. [Online]
Available from: http://www.pwc.de/fileserver/EmbeddedItem/PwC%20TL%20China
%20Retail%20Apr%202006.pdf?
docId=e502f94f9294a46&componentName=pubDownload_hd [Accessed on October 25,
2009]
[13] [14] [21] [23] The Economist (Oct 15, 2009) Impenetrable: Selling foreign goods
in China [Online] Available at: http://www.economist.com/displayStory.cfm?
story_id=14660438 [Accessed on October 25, 2009]
[17] The Economist (ed.) (2009) Pocket World in Figures – 2010 Edition. London, Profile
Books, 132-133
[18] The Economist (June 25, 2009) Shopaholics wanted: Consumer spending in China
[Online] Available at Http://www.economist.com/businessfinance/displaystory.cfm?
story_id=E1_TPJDDTNV [Accessed on December 1, 2009]
[19] McKinsey (2008) Preparing for China’s Growth [Online] Available at:
http://www.mckinsey.com/mgi/publications/china_urban_summary_of_findings.asp
[Accessed on December 10, 2009]
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[26] McElwee, Charles II (2008) Who’s cleaning up this mess? Rising environmental
awareness is affecting business in China. China Business Review [Online] Available
from: http://www.chinabusinessreview.com/public/0801/mcelwee.html [Accessed on
December 5, 2009]
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Appendix
1. Map of China
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3 .Procedure of WOFE
Registration Procedures
Foreign companies are not allowed to directly submit the application documents to the
relevant authority. They must retain a PRC entity that is authorized or permitted by
relevant authorities to act as a sponsor. The sponsor will submit all the documents to the
examination and approval authority on behalf of the foreign enterprise. Procedures to set
up a Wholly Owned Foreign Enterprise in Shanghai are as following:
Step1: Company name checking and registration (about 5 working days)
Step2: Approval Certificate (about 15 working days)
Step3: Business License (about 7 working days)
Step4: Organization Code License (about 1 working day)
Step5: Tax registration(about 7 working days)
Step6: Open an RMB bank account (about 3 working days)
Step7: Register Foreign Currency Certificate (about 1 working day)
Step8: Capital verification (about 7 working days)
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