Entry Strategy in an Emerging Market - H&M in China - Essay Example

Entry Strategy in an Emerging Market: The Case of H&M in China 2006 Introduction Many multinational companies have in the past rushed to emerging countries, that is those that are on the lower end of the global income pyramid but on the fast growth track and have a billion or so population, to tap the immense profit potentials. However, most of them have soon realized that duplicating the winning brands in the western, developed societies are not necessarily lapped up enthusiastically in these new markets. Neither do translating western marketing ideas typically, dependent on product innovation and segmentation, high margins and global brands, always work in other markets that are defined by their own uniqueness. In emerging markets, on the other hand, greater importance is given to consistency, rough segmentation, functionality of the product, low margins and adabtability to local conditions (Chattopadhyay and Dawar). It requires a closer scrutiny of the markets to zero in on the those which have consumer preferences closest to those in the home country of the company and market conditions are favorable as well as to chalk out a clear entry strategy in terms of product differentiation and positioning, sales networks, procurement and manufacturing strategies. In this paper, I will design an expansion strategy of H&M, the Swedish clothing company, into an emerging market, namely China. After describing the competitiveness of H&M in the developed market, I will examine how it can translate its strengths in the emerging market and the basis of choice of the country. Thereafter, I will frame an entry strategy in the Chinese markets in terms of pricing, product, distribution, sourcing and marketing strategies. Lastly, I will also briefly describe the risks involved in doing business in China. H&M: A Multinational Clothing Company H&M, earlier known as Hennes and Mauritz, is a nearly sixty-year old clothing company based in Stockholm. It was established in 1947 when Erling Persson opened a women’s dress store by the name Hennes (meaning ‘hers’) in Vasteras. In 1968, Persson bought Mauritz Windforss, a hunting equipment company that also sold men’s clothing. The company was renamed Hennes & Mauritez, later abbreviated to H&M. Today, H&M owns 1900 stores in 22 countries in Europe, the United Kingdom, the United States and Canada, 55,000 employees. The Church of Sweden is the major shareholder of the company (wikipedia). The strength of the company is in discount fashion range, targeting huge volumes and relatively lower margins. More recently, however, H&M has also entered in the designer label segment, with its foray in the Milan Fashion scene in 2003 and incorporation of designer collections of Karl Lagerfield in 2004 and Stella McCartney in 2005 (wikipedia). However, the $40 glen plaid trousers, $50 faux-fur-trimmed cardigans, $200 dress coats and such affordable range of clothing have remained the mainstay of the company (Rubin, 2005). The stores also have hundreds of $13 sports T-shirts and $19 turtlenecks and sweaters (Launderie, 2005) These are the products that H&M can put on the shelves every 20 days despite not having any manufacturing outfit of its own and sourcing all its products from elsewhere, mostly from China and other South East Asian manufacturers. H&M has expanded all over Europe, UK – where the company is growing fastest – and the USA, a market it entered in 2000. Beginning from the East Coast – with the flagship in New York’s Fifth Avenue and more stores in Manhattan, Upstate New York, Syracuse, Utica, West Nyack – it has now expanded to Chicago and its suburbs and in San Fracisco on the West Coast. In Canada, H&M has stores in Toronto. The company plans more stores in in Montreal, Ontario and Quebec (Wikipedia). The main competitiveness of H&M products in the markets that they operate in is, as Rubins (2005) describes, “Cheap, fast and trendy”. H&M products are fashionable yet affordable. Graduating from the simple styles of the 1950s, H&M sells products that are heavily researched by the 100-odd in-house (mostly Swedish) designers and follows the trends closely. With stiff competition from the other affordable trendy retail chains in the USA like Target, Zara (Spanish) and Forever 21, and Mark & Spencer in the UK, H&M has specialized in high turnaround of designs, price competitiveness and easy availability of products and sizes. The stores get new stocks every morning and judiciously plan their stocking patterns so that there is enough on the shelves always. As a result, nearly 800 million pieces are sold every year. H&M has annual sales of $6 billion according to market research company, Deloitte, is one of the world’s top 50 retailers. In Europe, H&M, which has grown by over 70 percent between 1999 and 2003, is second only to Mark & Spencer, according to Mintel (H&M.com). In its aggressive drive towards expansion – H&M has opened about 150 stores over the last three years and plans to open another 160-odd stores, mostly in the USA and Canada – it has given tough competition to the local retailers, offering fashionable clothing for men, women, teens and children at reasonable prices. The main reason for H&M’s popularity, besides low prices, is the fast turnaround of products. The products move from the company’s designers to the stores’ hangers in just 20 days, with super-efficient inventory and sourcing management. Only Zara can turnaround faster, at 14 days, but its prices are 30 to 50 percent higher (Larenaudie, 2005). Every H&M store is restocked daily with some, like the flagship in Paris, getting 2-3 truckloads every day. Due to its ability of fast additions, H&M can add new fashion to its lines faster as well. However, H&M plans its product designs on customer feedbacks rather than on runway trends. The effectiveness of H&M’s business model lies in its ability to match its design competence with its sourcing patterns and the economies of scale that it entails. Choice of Country In its tryst with expansion, looking towards an emerging market definitely falls in line with H&M’s strategy. While deciding on the particular emerging country that H&M can enter, one needs to look at the economic, sociopolitical and market factors that differentiate each country. In this section, I will review these factors in three emerging countries – namely China, Russia and India. Economic factors – Among the three countries, China has been the fastest growing economy, with GDP growth at 10 percent per annum, followed by India’s 8 percent per annum and Russia’s 6 percent per annum. The following table shows the comparative economic indicators for the three countries. Table: Economic Indicators Year 2005 China India Russia Population (mn) 1,313.9 1,095 142.8 GDP ($bn market prices) 1790.0 720.6 740.7 GDP growth (%p.a market prices) 9.3 7.6 5.9 Per capita GDP ($, purchasing power parity) 6,300 3,400 10,700 Share of services in GDP 32.5% 51.4% 60% Source: CIA Factsheet As is evident, the largest market in terms of population is China, followed by India. Both the Chinese and the Indian market are individually larger than the entire North American market in terms of population. Although the per capita income is highest in Russia, primarily because of its lower population density, China’s GDP is more than double of that in India and Russia. It is also the fastest growing economy and it is in the process of urbanization, with the share of services in GDP (32.5 percent of GDP but employing 68 percent of the labor force) still lower than that in India and Russia. China, which began market-oriented economic reforms after being in the autocratic socialist system since the World War II, is in the process of fast transformation. Its demographics are favorable for a retail market growth, with 71.4 percent of its population falling in the age group of 15-64 years. Due to its official one-child policy, the population growth has been slow, at 0.59 percent (CIA). Although the political regime in China is communist, the economy has been liberalized with rapid development of the private sector and huge growth of foreign investments. With the entry of multinational countries, the Chinese consumer patterns have changed with greater orientation towards world-class products and brands. Also, China is one of the largest users of the Internet, with over 100 million people logging in, which is more than in the United States (Lloyd, 2006). The increase in wage rate, as a result of growth in trade and commerce, higher disposable incomes and the exposure to the western world of fashion through the media and the internet provides huge opportunities for consumer products like fashion clothing. India has also grown fast over the recent past but at a slower pace than China and its GDP, as well as per capita GDP, falls short of that of China despite having comparable population as China. India also has favorable demographics, with the young population (in the age bracket of 15-64 years) composing 64.3 percent of the population. India’s growth has largely been driven by the service sector, which contributes 50 percent of the GDP. The services sector however, employer fewer people than the agricultural sector, which still employs 70 percent of the Indian population. Hence, the target population for consumer products like fashion clothing is relatively narrow than that in China. That is, despite the high GDP growth rate, the number of people who benefit from this growth in India is not as many as that in China. Besides, India does not yet allow 100% foreign investment in the retail sector. Hence, a multinational company entering this sector would have to enter into a joint venture agreement with an Indian company – a strategy that is alien to H&M. Russia, erstwhile part of the USSR, which broke up in 1991, has recovered from the financial crisis in 1998. With high oil prices, being a major oil producer, and cheap currency, the consumer market has also grown in Russia. Over the last five years, fixed investments have grown, personal incomes have risen and consumer spending has grown. Despite the recovery, however, Russian manufacturing continues to be in a shambles, the poor business climate discourages foreign and domestic investors and there is a general lack of trust over the financial institutions (CIA). Thus, in terms of economic indicators, China appears to be the most favorable market from the point of view of H&M’s expansion. Sociopolitical factor – Among the three countries under consideration, China has the most proactive sociopolitical background for investments by multinational companies. While bureaucracy and red tapes are still a deterring factor in India, there is also considerable opposition to opening up the retail sector to multinational companies. In a country in which the retail is largely fragmented, with 70 percent of the market being controlled by small local stores, any attempt to open up to the modern hypermarkets or specialized stores like those of H&M is likely to come up with political opposition in the country. The Russian consumer market, too, continues to be primitive and the demand for H&M products is likely to be limited. In contrast, China encourages foreign investment in the retail. Entry Strategies Once deciding on entering the Chinese market, H&M needs to rethink on its entry strategies. While acknowledging that the value for money proposition that H&M offers is close to the emerging market demands, the competitiveness that its product strategies give it in developed markets is not necessarily suitable in the Chinese market. The Asian mindset is more oriented towards consistency in the product and not necessarily fashion-oriented – that is, they do not throw away a piece of clothing after a season simply because it is out of season. There is more value attached to quality and durability and H&M does not score too highly in these parameters in its existing stores (Larenaudie, 2004). The “bigger, faster, better” and the “new and improved” advertisement campaigns, that work wonders for consumer products in developed markets, may not work in an emerging market like China (Chattopadhyay and Dawar). Also, the product segmentation should be unique for China. The buyers here may not find the designer labels from Europe attractive. Instead, standardized global fashions, or modified according to local designs, incorporating perhaps traditional embroidery, may be useful. Also, since a large part of the H&M products are sourced from China, the company could think of using local fabrics and incorporate traditional designs, motifs and embroidery along with the global trendy designs. Besides, H&M should formulate its pricing strategy specifically for the Chinese market and not follow its global patterns. Typically, the Chinese consumers compare the product prices with the locally produced products and not with global prices. Large volumes and low margins should be the target strategy. Hence, an aggressive pricing strategy is required for grabbing market share fast. For example, when Harlequin Enterprises, entered with its novel books portfolio in eastern Europe and Asia, it developed a different marketing and pricing strategy in each country (Chattopadhyay and Dawar). Research and pre-entry strategy formulation is very important since it may be difficult to adapt to market structures later on. Risks The risks that H&M faces in China are mainly those of a newly urbanizing economy. Although hypermarkets and niche product stores are increasingly coming up in China, nearly 77 percent of retail market is still controlled by the local small stores. The other risks that the Chinese market poses is the sustainability of the growth, which some analysts have found too fast. The political regime is still communist and the bureaucracy is often high-handed. The industry is closely monitored and the government plays a crucial role in all economic activities. The economy of China is also closely linked with global markets as it has emerged as the major sourcing region for all types of manufacturing. A global meltdown will affect the Chinese economy as well. Conclusion To break into this closely-knit market, H&M should choose its locations well, where the young generation of shoppers, mainly the young earners with western education, come to shop. The pricing and product strategies should be uniquely defined and a ‘copy-paste’ strategy of translating the western model here will be futile. The advertisement campaign should also be designed suitably without hurting the Chinese sensibility as the population is quite sensitive about its Asian roots. Hence, H&M should project a western-eastern balance in its media campaigns, products and displays. Works Cited Chattopadhyay, Amitava and Niraj Dawar, Rethinking Marketing Programs for Emerging Markets, IQ, The INSEAD Quarterly, retrieved from http://www.insead.edu/inspire/issue_012/article1b.html CIA, The World Factbook, retrieved from www.cia.gov/cia/publications/factbook/ Larenaudie, Sarah Raper, Inside the H&M Fashion Machine, Style and Design, Time Magazine, September 2, 2004, retrieved from http://www.time.com/time/2004/style/020904/article/inside_the_h_m_fashion_01a.html Lloyd, Elizabeth, Tips for Entering Chinese Market, iMEdia Connection, April 13, 2006, retrieved from http://www.imediaconnection.com/content/9064.asp Rubin, Sylvia, Fast fashion comes to the city: H&M clothing chain sells hip, low-cost rags for bargain hunters, San Francisco Chronicle, November 6, 2005, retrieved from http://www.sfgate.com/cgibin/article.cgi?f=/c/a/2005/11/06/LVG8AFH0KB1.DTL Wikipedia, H&M, retrieved from http://en.wikipedia.org/wiki/H&M Read More