Marks & Spencer's Choice for Target Germany - Term Paper Example

 I. Introduction This paper aims to conduct a situational analysis for Germany as Marks & Spencer's choice for a target country for its foreign expansion within the European region. The analysis starts with the country analysis, where PEST analysis is used as the major framework, followed by the industry analysis with Michael Porter's five forces framework. Competitors are also determined and consumers are assessed to come up with the big picture, viability of entering the German market. SWOT analysis is conducted on the last part in order to put the environmental variables in a coherent framework. At the last part, the overall viability of the German market will be assessed according to these variables. II. Body A. Country analysis The target country for Marks & Spencer's international expansion in Europe is Germany. The decision has been based on Germany's rank in terms of overall value for the major industries where M&S operates: apparel retail industry, food retail industry, and on-line retail industry within Europe. Germany has the second highest share in terms of value for the apparel retail industry (Datamonitor: Germany Apparel Retail 2009); the highest share in terms of value for the rood retail industry (Datamonitor: Germany Food Retail 2009); and the third highest, next to the United Kingdom and France, in terms of value for the on-line retail industry (Datamonitor: Germany on-line Retail 2009). The country analysis is done by conducting a typical PEST analysis, short for Political-Legal, Economic, Socio-cultural, and Technological analysis. The input for the analysis come from legitimate publications such as Datamonitor Country Profiles, I.H.S. Global Insight, Business Monitor International, and Country Report and Country Intelligence publications by The Economist Intelligence Unit. i. PEST analysis The PEST analysis is one of the frameworks that has always been used for environmental scanning. As the analysis outlines the different forces that will impact the organisation according to the four macro environmental variables, the framework is a useful tool to scan the environment for strategic purposes. However, the quality of the analysis will greatly depend on the quality of the inputs, as well as the legitimacy of the sources. The political landscape of Germany has changed since the beginning of the financial crisis in 2008. One of the most notable changes over the years include tax reforms that increased the value-added tax in 2007, lowered corporate rates in 2008, as well as streamlined capital gains taxes in 2009 (Country Commerce 2009, 6). These changes have positive implications to M&S should it pursue entering the country through foreign expansion. However, one negative change in the politico-legal landscape in the country which can significantly affect M&S's prospects is the imposition of a legal minimum wage in the country (Country Commerce 2009, 6). After the elections last September 27, Angela Merkel has won “13 seats to take 239 of the 622 seats in the new parliament (Business Monitor International 2009, 2).” With the coalition of the CDU-FDP party, the chancellor will have an easier time enacting more liberal economic policies, which has been hindered by the previous CDU-SDP coalition, due to differences in political opinions (Business Monitor International 2009, 2). This has good implications for M&S. The economic landscape in Germany does not look so good, however. With the effect of the global financial crisis, the country is expected to contract by 6.0% in terms of its real GDP (Business Monitor International 2009, 2).. Because Germany's economy is highly reliant on exports, the economy's prospects have been gloomy. The German government has issued fiscal stimulus packages to ailing financial and non-financial sectors that are affected by the crisis (Business Monitor International 2009, 2).. However, unemployment is still expected to increase in the coming months. As for the social landscape of the country, social welfare sectors have significantly improved over the years, leading to longer life expectancy and lower infant mortality (Datamonitor 2008 17). There is rapid urbanization in the country, however, the country's majority of the population is already ageing. This has a significant implication for the longer term, with shortages in the labour sector are already being an apparent threat to the country. Social inequality is also an issue, where Germany has the widest gaps in terms of income inequality between genders—women earn 22% less than men (Datamonitor 2008 17). There is also a prevailing poverty in the country, where the middle class has shrunk due to the decrease in average gross income, while the upper class have increased over the years (Datamonitor 2008 17). Germany is one of the most advanced countries in terms of technology. This has been apparent in the country's sophisticated technological structure as the government continues to spend more on information and communications technology, as well as research and development spending (Datamonitor 2008, 21). This has implications for consumer behaviour in the country as well as the mode for purchasing. This can be good for M&S's on-line retail operations. However, as the country's technological landscape progresses, the major threat, as identified in the technological landscape is the decline in the supply of skilled technical labour force (Datamonitor 2008, 21). B. Industry analysis Marks & Spencer Group, Plc is a multi-line retail company, with major operations including apparel retail, food retail and on-line retail. In order to know more about the risks in expanding in Germany, the company needs to analyse these industries within the target country. By looking at the different segments of the industry, M&S can look if its entrance is more appropriate. This is also best done by using Porter's five forces framework, where the dynamics of these industries are analysed according to variables that Michael Porter has identified which can set the industry landscape. However, the validity of this analysis is also dependent upon the inputs, as well as the relative interpretations of the variables as either high, low, moderate in their effect on the firms' profitability. The inputs that are used for the analysis include information from publications such as Datamonitor. i. Apparel retail industry Germany's apparel industry has grown in 2008 by 0.2% up to $78.7 billion, which is comprised of three major segments: women's wear which is 55.40% of the industry's sales; men's wear 30.80% of the industry sales; and infants' wear which is 13.80% (Datamonitor: Germany, Apparel Retail 2009, 11). The apparent retail industry in Germany is a good prospect in terms of size, as it is the second highest in Europe after Italy—much larger than the UK market for apparels (Datamonitor: Germany, Apparel Retail 2009, 11). The barriers to entry in the retail industry in Germany is moderate, even though the industry is more concentrated than in any country in Europe, as this is apparent in the large number of small and medium scale enterprises in the country (Datamonitor: Germany, Apparel Retail 2009, 12-14). New entrants can face price wars from existing retailers, with strong brands of the incumbent players (Datamonitor: Germany, Apparel Retail 2009, 12-14). Because clothing is a necessity, the threat of substitutes to apparels is low. The bargaining power of supplier is low as well because of competition from low-wage regions such as countries from the South-east Asia (Datamonitor: Germany, Apparel Retail 2009, 12-14). The bargaining power of consumers has increased because of the increase in choices for consumers for purchasing apparels. The overall rivalry in the industry is moderate as players compete for revenues due to the decline in the overall industry performance due to financial crisis. ii. Food retail industry Germany has the largest share in terms of value in the Europe's food retail industry at 16% (Datamonitor: Germany, Food Retail 2009, 11). The buying power in the country is moderate—the consumers can switch from one competitor to the other with the existence of lower-priced retailers. As for supplier power, it is moderate in that retailers have to commit to steady supply for a longer period in order to ensure that running out stocks become an issue (Datamonitor: Germany, Food Retail 2009, 12-13). The threat of new entrants is a bit high in Germany—with the presence of large retailers who have been exploiting economies of scale, it is usually hard for new entrants to match these large players in terms of pricing and competitive offers (Datamonitor: Germany, Food Retail 2009, 12-13). This is also due to strong brands that these large retailers have. As for the threat of substitutes, the diminishing popularity of subsistence farming which is a substitute to buying in retail stores has made it weak (Datamonitor: Germany, Food Retail 2009, 12-13). The overall rivalry in the food retail industry is strong—this is because of the almost non-existent switching costs to consumers, as well as better information where consumers acquire prices for comparison, which often leads to price wars (Datamonitor: Germany, Food Retail 2009, 12-13). iii. On-line retail industry Germany is the third highest on-line retail industry in Europe, next to United Kingdom and France. on-line retail sales in Germany comprise 26.20% of the regional industry sales (Datamonitor: Germany, on-line Retail 2009, 11). Buying power for the retail industry in the country is moderate—this is due to the low switching costs for consumers when making a choice for retailers. However, because of the riskiness of on-line transactions when it comes to security, larger retailers, with their strong brands have increased the loyalty for some customers (Datamonitor: Germany, on-line Retail 2009, 12-13). Large retailers source their supplies from a number of suppliers—with the advancement of ICT, this has become more possible and less costly. Therefore the supplier power is moderate as it has declined over the years. The barriers to entrance is low, mainly because of the very low fixed costs due to platform of the internet (Datamonitor: Germany, on-line Retail 2009, 12-13). Even with the stronger brands showcasing their reputations, smaller competitors can very well compete because as the lower cost structures make them provide an equal level of service. For the threat of substitutes—which are traditional shopping in brick-and-mortar stores and catalogue/direct marketing, the threat is moderate (Datamonitor: Germany, on-line Retail 2009, 12-13). The increase in on-line transactions is offset by consumers' preference to traditional ways of shopping, as well as concerns for buying on-line due to security reasons (Datamonitor: Germany, on-line Retail 2009, 12-13). The overall rivalry is moderate. C. Competitor analysis i. Apparel retail industry In Germany's apparel retail industry, there are three leading companies: Otto (GmbH & Co KG); C&A, and Arcandor AG. Otto operates in 19 countries with its 123 companies worldwide; this company focuses on multichannel retail, services as well as financial services (Datamonitor: Germany, Apparel Retail 2009, 15-19). C&A is a company based in Belgium. This company operates in 15 European countries with its 900 stores (Datamonitor: Germany, Apparel Retail 2009, 15-19). The combination of the company's retail mix include its retail branches, kids stores, clockhouse shops, and women stores. The company's major proposition in terms of its services is its made-to-measure services, with the use of 3-D body scanning technology (Datamonitor: Germany, Apparel Retail 2009, 15-19). Arcandor is also a company based in Germany. This company's operations span from tourism to retailing through three business divisions, which is involved in mail-order business as well as premium department stores (Datamonitor: Germany, Apparel Retail 2009, 15-19). This is the major proposition of this company when it comes to its offers. ii. Food retail industry Three of the largest companies in the German food retail industry include Edeka Group, Rewe Group, and Lidl Dienstleistung GmbH & co. Kg (Datamonitor: Germany, Food Retail 2009, 20-24). Edeka Group has more than 12,000 outlets over the country. The major proposition of this company is that its group spans within the value-chain, such as functions for distribution, as well as manufacture of meat and bakery products, as well as sourcing its own brand for produce (Datamonitor: Germany, Food Retail 2009, 20-24). This integration has given the company some cost advantage in the industry. Rewe, the second largest food retailer in Germany has 12,719 stores in 14 countries—8,900 of which operates within the country (Datamonitor: Germany, Food Retail 2009, 20-24). The company's offer ranges from full-range stores, discount stores, national specialist stores, as well as commercial wholesale delivery service (Datamonitor: Germany, Food Retail 2009, 20-24). This variety in its store formats allow it to include many smaller specialist stores in the process. Lidl on the other hand banks on deep-discount offers through its department stores, and no-frills supermarket in its 6,800 stores across Europe (Datamonitor: Germany, Food Retail 2009, 20-24). With its 3,100 stores in Germany, the company offers in-house brands to consumers. iii. On-line retail industry The on-line retail industry is dominated by some of the largest retailers in the apparel retail industry (Datamonitor: Germany, on-line Retail 2009, 14-20). The leading company in the apparel retail, Otto, also leads the on-line retail industry. Second to it is Amazon.com, Inc.--a US based-on-line retail player that caters to seller customers, developer customers apart from providing service to consumer customers (Datamonitor: Germany, on-line Retail 2009, 14-20). With this different infrastructure, the company's promise include better on-line shopping experience with superior customer service. Another big player in the on-line retail scene is Karstadt Quelle, a division of Arcandor. The major proposition of Karstadt Quelle is its premium positioning, as apparent in the company's premium store formats which carry luxury and designer brands (Datamonitor: Germany, on-line Retail 2009, 14-20). D. Customer analysis Over the years, German consumers have not increased private consumption that much (Business Monitor International 2009, 3), with an increase of 1.5% from 1998 to 2008. With the apparent worsening of the economic conditions in the country, this consumption level is expected to fall some more. E. SWOT analysis for Marks & Spencer Plc The strength of the Marks & Spencer Plc lies in its brand positioning as well as its business structure (Vitorovich 2009). The M&S brand has rejuvenated during the past years when it has focused on increasing the quality of goods and service that it offers to consumers (Marks & Spencer 2009; Businessweek 2009). The company's business structure has enabled the company to achieve economies of scale over the years (Marks & Spencer Group Plc 2009). As for the company's weakness, it does not have an experience in the German market compared to its incumbent rivals. However, opportunities in the form of the shift from brick-and-mortar to on-line retail shopping in Germany during the harsher times can be exploited by the company (Sandler 2009). Favourable regulations such as lower corporate taxes are opportunities as well. As for the threats, these include certain regulations in the country such as the legal minimum wage, as well as the worsening economic climate in the country due to the effects of the financial crisis. III. Conclusion The German market is very attractive because of its size relative to the other countries in the European region. However, from the PEST analysis, it can be concluded that the bottom-line profitability of M&S venture in the country may not be met because of decreasing favourableness in the country's economic climate. For the industries, the apparel retail and on-line retail are moderate in terms of overall rivalry, but rivalry in the food retail is strong. With the presence of large competitors who have strong brands and are currently enjoying economies of scale, M&S may not be able to recoup its target returns on investment in the country if it pursues its venture now. 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