Download Global Marketing

LEEDS METROPOLITAN UNIVERSITY
Global Marketing
Summative Assignment, Semester 2, 12/13
BA (Hons) Marketing
Todd Bullions | 33241600
Submission date: 14th May 2013
Word count: 4,500
Assessor: Jon James
Contents
1.0
H&M Company Profile ........................................................................................................... 1
1.1 H&M Company History........................................................................................................... 1
1.2 Brand Portfolio....................................................................................................................... 1
1.3 Resource base ........................................................................................................................ 1
1.4 Operations ............................................................................................................................. 2
1.5 Markets Served ...................................................................................................................... 2
1.6 Markets under development .................................................................................................. 3
1.7 Channels to Market ................................................................................................................ 3
1.8 SWOT Analysis ....................................................................................................................... 3
2.0
H&M’s Development into non-domestic markets ................................................................... 4
2.1 The Uppsala Internationalisation Model ................................................................................. 4
Fig 1.0: The Uppsala Model applied to H&M’s Development into non-domestic markets ............ 4
2.2 EPRG Framework ................................................................................................................... 6
2.2.1 Ethnocentric (1947-1965) .................................................................................................. 6
2.2.2 Regiocentric (1964-2001) .................................................................................................. 6
2.2.3 A Geocentric Transnational (2001+) .................................................................................. 6
2.2.4 A Geocentric Future? (2013+)............................................................................................ 7
Fig 2.0: The Uppsala Model applied to H&M’s Development into non-domestic markets ............ 7
3.0
Analysis of the Brazilian fashion retail industry....................................................................... 8
3.1 12C Framework........................................................................................................................ 8
3.1.1 Country ............................................................................................................................. 8
3.1.2 Concentration ................................................................................................................... 8
3.1.3 Culture/Consumer Behaviour ............................................................................................ 8
3.1.4 Channels ........................................................................................................................... 9
3.1.5 Caveats ............................................................................................................................. 9
3.2 The Macro-environment .......................................................................................................... 9
3.3 Porter’s Five Forces – The Micro-environment ....................................................................... 10
Fig 3.0 Forces driving competition in the apparel retail industry in Brazil, 2012 ........................ 10
3.3 Assessment of the Brazilian apparel retail market .................................................................. 11
Fig 4.0 Relative product prices ................................................................................................. 11
4.0
Relevant Market Entry Modes .............................................................................................. 12
4.1 Export Mode – E-Commerce .................................................................................................. 12
4.2 Intermediate Mode - Franchise .............................................................................................. 12
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4.3 Appropriate Entry Mode - Hierarchical Mode – Greenfield Investment – supported by ecommerce. .................................................................................................................................. 13
5.0
Final summary ..................................................................................................................... 14
Bibliography ....................................................................................................................................... i
Appendix 1: Key Company Information ............................................................................................. iv
Appendix 2: H&M’s expansion into non-domestic markets ................................................................ v
Appendix 3: Growth of Online Retail in the Developed World ........................................................... vi
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1.0 H&M Company Profile
Founded in 1947, in Stockholm Sweden, Hennes & Mauritz (H&M) has grown to be the world’s
second largest fashion retailer (Chu et al, 2012) with recorded revenues of SEK140,948m
for the financial year ending November 2012 (H&M, 2013).
H&M’s product portfolio consists of; “affordable fashion apparel, cosmetics, accessories and shoes
for women, men, teenagers and children” (MarketLine, 2012). Their position within fashion retail has
been solidified by their substantial globalisation strategy (ibid, 2012). This strategy has given the
organisation a presence in 43 markets which is supported by over 2,300 stores worldwide (H&M,
2013). H&M also offer an online retail operation in eight of its key markets (Fleming, 2013). H&M’s
ambition for growth is not wavering, with newly published growth targets of increasing their number
of stores globally by 10–15% per year (H&M, 2013).
1.1 H&M Company History
With a storied history H&M have had some significant milestones in their existence, namely;
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Erling Persson founded Hennes in Vasteras, Sweden in 1947. Later, Hennes acquired the
hunting and men's clothing chain of stores, Mauritz Widforss, in 1968 and changed its name
to H&M Hennes & Mauritz (H&M).
Expanding out of its home country during the 1960s, the group developed its network in
Norway (1964) and Denmark (1967).
Further international expansion occurred at the start of the 21 st century; H&M opened its
first store in North America, Portugal, the Czech Republic, Italy and Poland.
With a view to rejuvenate its brand name, the group signed Madonna in 2007 to create a
fashion line "M by Madonna".
In July 2011, H&M partnered with David Beckham to launch his new bodywear range.
1.2 Brand Portfolio
H&M’s brand portfolio has expanded over recent years to now consist of; ‘COS’, ‘Weekday’, ‘Monki’,
‘Cheap Monday’, and ‘&Other Stories’. This multi-brand approach enables H&M to cater for
different consumer groups, fashion trends and price points (Cruz, 2013).
1.3 Resource base
H&M’s resource base has provided the organisation with a competitive advantage within the fashion
retail industry. This has resulted in annual revenue increases despite continued investment in their
internationalisation strategy. H&M’s business model is supported by its personnel, particularly their
in-house designers who work with various materials and fashion buyers to create a wide range of
fashion collections (MarketLine, 2012). Collections are then distributed via a central logistics centre
to H&M’s International markets, dependant on the current trends and the subsequent demand from
that country and/or region (ibid). This ensures “continually changing assortment of rock-bottompriced goods to help keep shoppers coming back for more” (Cruz, 2013).
To support this business model H&M altered their organisational structure in 2007, moving their
design, buying, and logistics departments into one separate company (MarketLine, 2012).
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H&M’s designers are supported by “partnering with big-name designers, celebrities, and high-profile
supermodels” (Interbrand, 2013). Recent examples of this include the ‘M-by Madonna’ range, as well
as David Beckham’s bodywear range, and their collaboration with legendary fashion icon Anna Dello
Russo (MarketLine, 2012). This collaboration with famous designers and celebrities is used both in
their products and advertisements as a form of celebrity endorsements which supports the brand’s
product offering by appealing to the “aspirations of its fashion savvy, pop-culture-following target
customers” (Interbrand, 2013). This continued success has resulted H&M’s brand equity being valued
at US$16,751m (Interbrand, 2013). Combining these factors of the organisations resource base helps
provide H&M with a competitive advantage for their future internalisation aims.
1.4 Operations
H&M’s retail operation is a centred around a process where fashion collections are designed
centrally before being outsourced to “third party vendors for the supply of its merchandise”
(MarketLine, 2013). This makes H&M vulnerable as it has no assurances of continued supply, pricing
or access to new products, as well as issues such as delays in order fulfilment and lack of quality.
Once the items are produced they are then distributed to H&M’s stores or regional replenishment
centres for distribution (ibid).
H&M looks to support its relationships with its sourcing markets through investing large resources
into sustainability programmes to ensure their operations are “run in a way that is economically,
socially and environmentally sustainable” (H&M, 2013). However H&M’s sustainability objectives do
not alter their growth plans as they still strive for continued growth of territory and inventory
despite their impact on environments around the world (Siegle, 2013).
1.5 Markets Served
H&M’s global expansion strategy has provided the organisation with a global foothold on the fashion
retail industry which can be seen with their involvement in multiple markets;
Region
Europe
North
America
Middle
East and
North
Africa:
Asia
Pacific:
Country
Austria, Belgium, Bulgaria, Croatia, Czech Republic, Croatia, Czech Republic, Denmark,
Finland, France, Germany, Greece, Hungary, Ireland, Latvia, Luxembourg, Netherlands,
Norway, Poland, Portugal, Romania, Russia, Slovakia, Spain, Sweden, Switzerland,
Turkey, United Kingdom
Canada, Mexico, United States
Bahrain, Egypt, Israel, Jordan, Kuwait, Lebanon, Morocco, Oman, Qatar, Saudi Arabia,
United Arab Emirates
China, Hong Kong SAR, Japan, Malaysia, Singapore, South Korea, Thailand
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1.6 Markets under development
With continued growth aspirations H&M has plans to develop their brand in the developing markets
of Serbia, Lithuania, Estonia, Australia, Indonesia, and Chile (Lishman, 2012).
1.7 Channels to Market
H&M’s globalisation strategy is supported by their various channels to market such as; leased store
premises, internet and catalogue sales, and franchise schemes (MarketLine, 2012). H&M only
currently offer online shopping in”eight of its 48 markets around the world” (Fleming, 2013) and as
such is an area of development. H&M recently expressed plans to expand this offering into new
markets including the lucrative U.S. online retail market (Bertfield, 2013).
1.8 SWOT Analysis
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Strengths
Fast fashion retailing
Sustainability initiatives
Widespread geographic presence
Improved market position in the clothing
segment
Opportunities
Growing preference to shop online
Expanding presence in key growth
markets of Asia
Growth in global apparel, accessories
and luxury goods market
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Weaknesses
Excessive dependence on third party
vendors for supply of merchandise
Threats
Weak consumer spending in Europe
Risk of foreign exchange fluctuations
(MarketLine, 2012)
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2.0 H&M’s Development into non-domestic markets
2.1 The Uppsala Internationalisation Model
The Uppsala model (fig 1.0) aims to characterise the different stages of a firm’s internationalisation
process (Johanson and Vahlne, 2009). This process relates to the firms increased market
commitment and its increased geographic diversification as it goes through the internationalisation
process (Hollenson, 2004).
The 1977 model is based on a study of the internationalisation of Swedish manufacturing firms and it
notes how these firms “begin their operations in nearby markets and only gradually penetrate more
far-flung markets (Hollenson, 2004, p.53). Johanson and Vahlne attributes psychic distance – “the
factors which make understanding foreign environments difficult” (2009, p.1412) - as a key rationale
for this incremental approach to internationalisation. This is supported by Hollenson (2004) who
argues that firms are attracted to countries with a minimal psychic distance as they are able to easily
identify opportunities and the perceived market uncertainty is low.
Fig 1.0: The Uppsala Model applied to H&M’s Development into non-domestic markets
H&M leapfrog first two
operation modes by going
straight to foreign sales
subsidiaries
(Hollenson, 2004)
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Whilst the model implies a rule that firms will incrementally increase their international market
commitment and geographic diversification (Hollenson, 2004), Johanson and Vahlne (1990 cited in
Hollenson, 2004) propose three exceptions to this rule:
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Firms with larger resources can take larger internationalisation steps
In stable and homogeneous markets, market knowledge can be gained in ways other than
experience
When firms have experience in similar markets, they may be able to generalise this
experience to any market
H&M’s expansion into non-domestic markets (Appendix 2) shows patterns that relate to the Uppsala
model. This is evident with their incremental geographic expansion into neighbouring European
countries such as Norway (1964) that continued right up until the end of the 20th century.
However this similarity does not immediately justify the models relevance to H&M’s global
expansion. The aged model is based on neoclassical business environments with often independent
suppliers and customers (Johanson and Vahlne, 2009). This may have suited H&M’s original
incremental expansion (Appendix 2: 1947-1999) but it is not relevant to their current business
model. Today their business model relies on its flexible interdependent network of suppliers and
customers, especially in their crucial manufacturing and distribution outsourcing programmes.
Furthermore, the Uppsala model is based on manufacturing firms and this may not be relevant to
the retail industry (Hollenson, 2004). This view is supported by Doherty (2000) who states the
“differences between the manufacturing and retailing sectors are significant” (p.225). This implies
that the very foundations of the Uppsala model are not relevant to the retail industry and H&M’s
expansion into non-domestic markets, questioning the model’s relevance altogether. This is evident
with H&M’s business model which leapfrogs the first two operation modes by going straight to
foreign sales subsidiaries with their retail outlets (fig 1.0).
The modes of operation that H&M leapfrog involve export entry modes. This mode is not relevant to
H&M’s business model as a fashion retailer. Furthermore it does not align with the organisations
growth objectives of increasing their number of stores globally by 10-15 per cent per year. The only
scenario in which export would be relevant would be through H&M’s online retail channel. However
H&M currently only operate this service in a small number of their markets, despite heavy market
commitment through retail outlets in many of their non-domestic markets. This portrays a reversal
of the operation modes in the Uppsala model, with H&M favouring initial market commitment
through foreign sales subsidiaries as opposed to sporadic export/export modes, thus further
reducing the relevance of the Uppsala model to H&M’s development into non-domestic markets.
H&M’s business model dictates that they do not own any store premises, instead it operates
through lease store agreements (MarketLine, 2012). This ensures their expansion into non-domestic
markets can be flexible should market conditions deteriorate. The same is true for H&M’s
production which they outsource to independent suppliers (H&M, 2013). This questions the
relevance of the Uppsala model as although H&M’s non-domestic expansion shows obvious signs of
geographic diversification its market commitment is limited due to the constraints imposed by
H&M’s flexible business model.
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2.2 EPRG Framework
The EPRG framework represents the orientations businesses management teams adopt when
conducting global business activity (Hollenson, 2004). The orientations organisations assume are
heavily based on their management’s beliefs and assumptions concerning global market
opportunities (Keegan and Green, 2010).
Hollenson (p.4, 2004) presents the orientations as follows:
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Ethnocentric: home country is superior and the needs of the home country are most
relevant.
Polycentric: each country is unique and therefore each country should be targeted in a
different way
Regiocentric: the world consists of regions, e.g. Europe, Asia, and the Middles East. The firm
tries to standardise its marketing programme within regions, but not across them.
Geocentric: the world is getting smaller and smaller. The firm may offer global product
concepts but with local adaptation
2.2.1 Ethnocentric (1947-1965)
H&M operated with an ethnocentric orientation within Sweden for a number of years to help
develop a strong brand as well as market and operational knowledge. As H&M began its early
incremental expansion, it portrayed ethnocentric characteristics such as limited changes to products
(ibid) due to the similar styles and cultures of the Scandinavian countries in which H&M operated.
2.2.2 Regiocentric (1964-2001)
As H&M progressed through their global expansion strategy it appears they by-passed the
polycentric orientation stage, instead opting for a regiocentric orientation which views global market
opportunities on a region-by-region basis (ibid). This is reflected in their incremental expansion
throughout Europe (1964-1999) and North America (2000-2001). It can be argued that the success of
H&M’s westernised expansion can be attributed to the cultural assimilation between these
countries/regions and the influence this has on consumer trends and purchasing decisions (Guo,
2013).
2.2.3 A Geocentric Transnational (2001+)
H&M’s recent strategy has seen their orientation change as their management beliefs and
assumptions have developed to consider the potential of a global market and the need to develop
integrated global strategies (Keegan and Green, 2010). This is evident with H&M’s 2007
organisational restructure (MarketLine, 2012). This suggests a move towards a transnational
company as H&M look to utilise their global supply chain to serve global markets (Keegan and Green,
2010).
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2.2.4 A Geocentric Future? (2013+)
As a transnational company H&M will have to continually re-assess their organisational structure as
global competitors emerge (ibid). With a growing online market throughout the developed world
(OECD 2012, cited in Hall, 2012) (Appendix 3), it is likely H&M will need to address their
geographically limited online delivery in the near future if they are to meet the growing needs and
wants of their global markets.
Furthermore as the concept of the global consumer becomes more prevelant, consumer trends may
become more homeogenous (Levitt 1983, cited in Akaka and Alden, 2010 ). This will enable H&M to
contine their business model across countries. However academics argue that globalisation
encourages consumer ethnocentrism as an attempt to preserve local identity and culture (Jackson
2004, cited in Akaka and Alden, 2010). As such offering a promotion adaption strategy (fig 2.0) in
their communication programmes (Keegan and Green, 2010) will facilitate H&M’s geocentric
transnational orientation.
Fig 2.0: The Uppsala Model applied to H&M’s Development into non-domestic markets
Product
Standard
Standard
Adapt
Straight Extension
Product Adaption
Promotion
New
Product Invention
Adapt
Promotion
Adaption
Dual Adaption
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3.0 Analysis of the Brazilian fashion retail industry
3.1 12C Framework
3.1.1 Country
The leading economy of Latin America and the sixth largest economy in the world (Mintel, 2013),
Brazil offers global market opportunities to a variety of industries as a result of its rapidly expanding
consumer economy. This consumer economy has been supported by an increasing availability of
credit (ibid). The consumer economy contributes to a clothing retail industry with total revenues of
$50.7bn in 2012 (MarketLine, 2013). This dynamic industry is being bolstered by an increasing
“demand supported by strong labour market conditions, moderate credit flows, and relatively
resilient consumer confidence” (Goldman Sachs 2013, cited in Carrico 2013)
With unemployment at 9.89% (PWC, 2007) and increasing wage gains, there are high levels of
consumer confidence which is helping to develop Brazil’s consumer economy (Mintel, 2013). This is
supported by the addition of approximately 30 million consumers who have been lifted from poverty
as a result of Brazil’s economic success despite the 2008 global financial crisis (ibid). This growing
and lucrative industry represents a global market opportunity for H&M to consider market entry.
However a lack of investment in the country’s infrastructure has resulted in logistical bottlenecks for
businesses operating in the country. As a result of these issues many companies compensate for the
logistical burden by increasing costs in their marketing and distribution (Kon 2013, cited in Mintel,
2013). This cost is increased due to the various taxes in place to protect domestic manufacturers
(PWC, 2007). However the government are trying to reduce this burden on retailers with payroll
taxes which they hope will allow retailers to lower their prices (Reuters, 2012).
As well as import taxes, firms also require a membership with Siscomex to allow them to import
goods into Brazil. The contributing factors of poor infrastructure, high taxation, and import licences
affects Brazil’s international competitiveness and “despite the growth of their economy Brazil still
lacks many of the popular US and European brands available in other emerging markets” (Mintel,
2013).
3.1.2 Concentration
The Brazilian fashion retail market is segmented as follows; Womenswear: 47.5%, Menswear: 33.8%,
Childrenswear: 18.7% which correlates with H&M’s product offering.
3.1.3 Culture/Consumer Behaviour
Brazilian consumers are heavily influenced by brands, and distinguish products by the brands
association with price, quality and status (PWC, 2007). Brazilian consumer also associate quality with
price (Beltrame 2013, cited in Mintel, 2013), therefore H&M may need to consider altering their
pricing to ensure their product offering is not seen as poor quality. Brazilian consumer culture
dictates the use of credit for a number of everyday purchasing decisions; as a result many retailers
embed high interest rates into their product pricing which increases the price of many consumer
goods (Mintel, 2013).
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3.1.4 Channels
Shopping malls and outlets continue to be developed throughout Brazil with each one designed to
suit the relevant profile of both the city it is in and the relevant customers (PWC, 2007). There is an
increasing culture of e-commerce in Brazil with the network of 70 million internet users contributing
to an annual e-commerce revenue of US$6.9 billion in 2006 (PWC, 2007). This is supported by
companies investing in improved distribution and delivery methods to support their online offering
(Euromonitor, 2013). The growing potential of online retail in Brazil is convincing a number of foreign
players to enter the market (ibid) and highlights the potential for H&M.
3.1.5 Caveats
Brazil’s infrastructure is central to the countries future prosperity. Currently the level of
infrastructure does not match its economic aspirations (Mintel, 2013) and this is effecting
organisations that operate within Brazil due to the ‘Brazil cost’. However with Brazil hosting the next
2016 Summer Olympics as well as the 2014 football World Cup, the government is likely to radically
improve the country’s infrastructure, particularly in the tournaments host cities (ibid). This should
reduce logistical issues for organisations, reducing the effect of the ‘Brazil cost’ which currently limits
Brazil’s international competitiveness, therefore making the consumer market more appealing to
the international brands which it currently lacks.
In attempt to combat the high costs of operating in Brazil, Zara have moved 40% of the production
on-shore, enabling them to lower their prices and remain competitive in the Brazilian consumer
market (ibid). This highlights a possible entry strategy for H&M.
3.2 The Macro-environment
Political
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Economic
Social
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Technological
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Stable political conditions with the left-centre Workers’ Party (Partido dos
Trabalhadores) leading a coalition government for the last 10 years (Leahy, 2012).
High import tariffs and taxes to protect domestically manufactured goods (Mintel,
2013)
Companies importing into Brazil require registration to Siscomex
Programme for accelerated growth (Programa de Aceleração do Crescimento)
(PAC); US$65.5 billion investment into improving Brazil’s infrastructure
History of corruption of political officials such as the Mensalão Scandal (Leahy,
2012).
Fifth largest economy In the world with a GDP of US$796billion (PWC, 2007)
Population of 181 million and an unemployment rate of 9.8% (ibid)
FDI is increasing reaching US$18.3billion in 2004 (ibid). Brazil’s FDI projects grew by
38% in 2011 (Financial times, 2012)
Import Tax, Federal VAT, Cofins, and Pis contribute to Brazil’s economy
Heavily influenced by brands and use brands to distinguish products in relation to
the brands association with price, quality and status (PWC, 2007)
Brazilian consumer culture dictates the use of credit for a number of everyday
purchasing decisions; as a result many retailers embed high interest rates into their
product pricing which increases the price of many consumer goods (Mintel, 2013).
There is an increasing culture of e-commerce in Brazil with the network of 70
million internet users contributing to an annual e-retail revenue of US$6.9 billion in
2006 (PWC, 2007)
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3.3 Porter’s Five Forces – The Micro-environment
The Five Forces Analysis tool (fig 2.0) helps to classify the main factors within a particular industry
(Brennan et al, 2008).
Fig 3.0 Forces driving competition in the apparel retail industry in Brazil, 2012
(Marketline, 2013)
Degree of
rivalry
Moderate
Buyer Power
Moderate
Threat of New
Entrants
Strong
Threat of
Substitutes
Weak
Supplier Power
Moderate
With a fragmented industry, composed of many independent apparel retailers,
there is a moderate rivalry (MarketLine, 2013). However the growing prosperity
of this industry with Brazil is attracting larger apparel retail organisations
(Mintel, 2013) that have the financial capacity to open outlets throughout the
country, which will intensify the degree of rivalry in this industry.
Due to the individual nature of apparel retail buyers, yet the array of choice and
low switching costs buyer power is classified as moderate (MarketLine, 2013).
Buyer power is also weakened due to the brands ability to differentiate through
style and price range (ibid)
The Brazilian retail industry is appealing to new entrants due to its growth,
value, low barriers to entry and low buyer switching costs, and low level of
product differentiation (ibid). However this threat may be weakened due to the
poor infrastructure and the high levels of Tax in the country which will increase
the costs for many new entrants (Mintel, 2013).
The overall threat of substitutes is deemed as weak as there are no real
substitutes to apparel retailers. There are alternative routes such as buying
direct from Manufacturers and shopping online through sites such as eBay,
however these routes pose little threat to the apparel retailers (MarketLine,
2013).
Brazilian fashion suppliers (Manufacturing and Wholesalers) power is weakened
as they face competition with low wage countries such as China and India (ibid).
The only real source of strength suppliers have is the risk involved with
changing suppliers as they may not be able to match the required output of the
fashion retailer (ibid).
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3.3 Assessment of the Brazilian apparel retail market
The rapidly growing Brazilian consumer market offers a lucrative (US$50.7bn) apparel retail industry
(Marketline, 2013). Supported by strong consumer confidence, an abundance of credit, and low
levels of unemployment (9.8%) (PWC, 2007), Brazil presents a real non-domestic opportunity for
H&M.
The crux of Brazil’s apparel retail industry is with the country’s poor infrastructure. Brazil has
prospered from its growing economy, yet the country’s logistical infrastructure has not kept up with
the pace of change. This operational burden is intensified with the addition of the essential Siscomex
import license needed to enable non-domestic firms to import into Brazil (Novais, 2011). This has led
to logistical bottlenecks, which along with a high taxation programme has led to retailers having to
increase their prices well beyond relative international prices (fig 3.0). This has led to the Brazilian
retail market being vacant of many popular US and European brands (Mintel, 2013).
Fig 4.0 Relative product prices
Product
Jeans
iPhone 4S
Brazil Cost
BRL1,000 (US$495)
BRL2,000 (US$995).
United States of America Cost
US$100
US$549
(Mintel, 2013)
These increased operational costs will undoubtedly affect H&M’s pricing strategy if they were to
enter Brazil, potentially forcing them to move their products into a premium market. This risk is
evident with Topshop’s entry into Brazil where their stores are located next to Prada and Dolce &
Gabbana (Mintel, 2013). However following a similar approach to Topshop would mean H&M going
against their core concept of giving the “customer unbeatable value, by offering fashion and quality
at the best price” (H&M, 2013).
Fortunately for H&M, Brazil’s government is working to improve the country’s infrastructure ahead
of the 2014 World Cup and 2016 Olympics. This development is supported by a series of
programmes for accelerated growth (PAC) which has seen the government invest US$65.5 billion
into the country’s infrastructure. This along with retail specific tax breaks will hopefully reduce the
‘Brazil cost’, allowing H&M to enter Brazil with a similar pricing strategy to their other international
markets. However pricing is critical in Brazil as consumers view price as an indicator of and therefore
H&M need to ensure the quality of their products is communicated to their target market within
Brazil.
Brazil’s growing consumer economy offers more growth prospects that the weak consumer spending
in Europe which is identified as a risk to H&M (section 1.8). Brazil’s retail market offers the
opportunity for H&M to work towards their global expansion goals. With the growing e-commerce
market in Brazil, H&M can also expand their online product offering as well. Entering Brazil will align
H&M with their geocentric orientation by serving global markets with their global supply chain. With
competitors currently operating in Brazil, H&M face a risk losing market share in this lucrative
economy. The ‘Brazil cost’ should soon be reduced due to Brazil’s PACs, enabling H&M’s business
model to operate in a similar way to its other markets, thus making market entry into Brazil a
suitable business opportunity.
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4.0 Relevant Market Entry Modes
4.1 Export Mode – E-Commerce
Hollenson (2004) argues that export modes are usually used in the initial stages of international
market entry. However as a retailer exporting is not relevant to H&M, unless they were to consider
an e-commerce direct export strategy. This approach would provide H&M with more control over
the marketing mix (ibid), thus ensuring consistency with their brand. This entry mode is justified by
the continued growth of online retail (MarketLine, 2012) and the 70million Brazilian internet users
that contribute to the country’s US$6.9 billion e-commerce market (PWC, 2007).
However this contradicts H&M’s growth strategy of increasing the number of their retail outlets by
around 10-15% per year (H&M, 2013).With no brand presence in the Brazilian market it is
questionable whether there will be sufficient demand for H&M’s online channel to support this
entry mode.
4.2 Intermediate Mode - Franchise
Franchise market entry would involve H&M building a relationship with a Brazilian franchisee to
enable H&M to set up their operations (Hollenson, 2004). Through this agreement H&M would
provide the franchisee with a standard package of business components such as;
Trademarks/names, copyright, designs, patents, business know-how (ibid). In return the franchisee
provides H&M with capital, market knowledge, and market feedback (Cateora and Ghauri, 2000).
This entry strategy would enable H&M to expand their development over larger areas of Brazil, with
minimum investment due to the addition of the vested interest of the franchisee (Chee and Harris,
1998). However a major risk with franchise schemes is the lack of control (Kotabe and Helsen, 2001)
which could affect H&M’s international reputation should the franchisee underperform (Hollenson,
2004).
Franchise schemes offer a low-risk/cost entry mode (ibid). However modes of entry with low
resource commitment, and therefore low risk, are unlikely to “foster the development of
international operations” (ibid, p.283). Root’s (1994 cited in Hollenson, 2004) suggests that
organisations follow a pattern of rules when deciding market entry strategies. H&M’s entry patterns
link to the strategy rule, ensuring any choice is thoroughly analysed and evaluated (ibid). The impact
of this shows that a Franchise scheme is not out of the question, however H&M has stated openly
that Franchise schemes are not part of their overall growth strategy (H&M, 2013), this suggests
H&M also follow a Pragmatic rule in that if their preferred entry mode is not available, alternatives
are investigated (Hollenson, 2004).
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4.3 Appropriate Entry Mode - Hierarchical Mode – Greenfield Investment –
supported by e-commerce.
Internal factors such as H&M’s size and international experience gears their organisation towards an
entry mode with more resource commitment than that required by the Franchise mode.
The recommended entry mode for H&M to enter the Brazilian retail market is to adopt a hierarchical
mode of Greenfield investment. This approach would see H&M establish their operations through
retail outlets (Kotabe and Helsen, 2001). This would require a large investment of time and capital by
H&M (Hollenson, 2004). However H&M would have full control over their non-domestic marketing
as well as 100% of any profits (Kotabe and Helsen, 2001).This approach would enable H&M to
integrate their business concept across Brazil, allowing them to prepare for future international
expansion across Latin America (Hollenson, 2004).
H&M’s size indicates it is prepared to commit to this entry model. The firm’s international
experience (Appendix 2) helps to reduce the costs and uncertainty of operating within the Brazilian
market, increasing the likelihood of H&M adopting this resource intensive strategy (ibid).
Brazil’s relatively stable government and growing consumer economy justifies H&M’s commitment
of resources as a result of this strategy. Whilst the country may have infrastructure issues, they are
being improved by the government’s PAC initiatives which look to reduce the logistical burden on
H&M and the subsequent ‘Brazil cost’ (Mintel, 2013). Whilst the lack of infrastructure may have
been a negative aspect of Brazil’s market attractiveness in the past, it has meant that the Brazilian
apparel retail market is lacking popular European and US brands (Mintel, 2013). This equates to a
low level of rivalry in market which justifies an increase in resource commitment (Hollenson, 2004).
A key aspect of H&M’s strategy is that they operate through leased store premises (H&M, 2013).
Therefore although they will be using a Greenfield Investment strategy, H&M can still remain
flexible, should market conditions deteriorate.
Opting for Hierarchical entry before the Franchise option is appropriate as the franchise mode could
cause tension when transitioning to a wholly owned subsidiary. Therefore this approach solves this
issue whilst keeping the option of a franchise programme available, should H&M want to use this
entry mode to increase their geographical expansion across Brazil.
With the growing popularity and value of Brazil’s e-commerce industry, this report recommends that
H&M support their entry into Brazil with an online channel. This will cater for the increasing culture
of e-commerce in Brazil (PWC, 2007) and help to spread H&M’s brand across the country.
Adopting this approach will allow for H&M’s entry into a growing Brazilian economy whilst also
providing the foundations for future international expansion throughout Latin America, potentially
through a regional distribution centre. These foundations can also help H&M to enter their other
brands into the Brazilian market, helping H&M to work towards their international retail growth
objectives.
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5.0 Final summary
H&M aims to increase its international expansion by increasing its number of stores annually by
around 10-15% (H&M, 2013). Despite successful launches in Europe, North America, and the MiddleEast, H&M has yet to establish themselves in South America.
Brazil came through the financial crisis relatively unscathed (Mintel, 2013), and as such has
experienced a growing economy over recent years which has contributed to a lucrative (and
growing) consumer retail economy valued at 50.7bn in 2012 (MarketLine, 2013). With
unemployment at 9.89% (PWC, 2007) and increasing wage gains, there are high levels of consumer
confidence which is being spurred by an abundance of credit in the country (ibid); it is clear why
H&M view Brazil as a potential market opportunity.
However a combination of protectionist tax laws and poor infrastructure has led to logistical
bottlenecks in the country, forcing retailers to recover their distribution costs in increased product
pricing (Mintel, 2013). This has led to Brazil’s retail market having increasingly high prices in
comparison to H&M’s other non-domestic markets (ibid). This factor, along with the Brazilian’s
judging quality on price poses the question whether H&M’s affordable fast-fashion brand will hold
the same position in the Brazilian market as it does in other markets.
Brazil’s rise as a major figure in the international market is mirrored by the country hosting both the
2014 Football World Cup and the 2016 Olympics. These events, accompanied by the governments
‘Programa de Aceleração do Crescimento’ (Programmes for accelerated growth – PAC) aim to solve
Brazil’s infrastructural problems, reducing H&M’s logistical burden should they enter Brazil
In terms of market entry exporting is not relative to H&M’s retail business therefore that is not
appropriate. Franchise agreements allow for low commitment and low risk, yet allow H&M to spread
its brand across Brazil with the help of the Franchisee. However without real resource commitment
it is unlikely that H&M’s international growth objectives will come to fruition.
Taking Root’s typology into account, it appears the most appropriate market entry strategy for H&M
is Hierarchical Entry via Greenfield investment. This approach provides H&M with full control and
allows H&M to integrate its successful business concept across Brazil, providing a route for further
international expansion across Latin America (Hollenson, 2004).
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Appendix 1: Key Company Information
“Fashion and quality a t the best price” (H&M, 2013)
1.1 H&M Global Expansion
1.2 H&M Group Income Statement
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Appendix 2: H&M’s expansion into non-domestic markets
Incremental expansion
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Appendix 3: Growth of Online Retail in the Developed World
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