Multinational Corporation Expansion - Case Study Example

Abercrombie and Fitch: Brazil BY YOU YOUR SCHOOL INFO HERE HERE Abercrombie and Fitch: Brazil Abercrombie and Fitch is a multi-national retailer providing high-priced casual and semi-casual merchandise targeted at the youth consumer market between 14 and 30. Currently, A&F maintains over 1000 retail centers in North America, Asia, and Europe, earning approximately 3.5 billion dollars in revenue in 2010. Sales are currently declining for Abercrombie and Fitch after nearly a decade of strong brand loyalty and positive consumer sentiment in key profitable markets. After examining the international market most favorable for expansion, Abercrombie and Fitch should consider entering the Brazilian market as this chosen market maintains national economic policy and market conditions that will provide A&F with considerable opportunities for revenue growth. The first dimension of international finance favorable for Abercrombie & Fitch in Brazil is the movement of financial institutions across international borders, including securities firms, banks and various investment companies. Brazil currently maintains an annual GDP growth rate of five percent annually, influenced by growth in financial institutions both domestic and related to foreign direct investment. Brazil maintains membership with a variety of economic institutions including Mercosur, G20, the World Trade Organization and the Cairns Group, giving the market more exposure in Europe as a viable market for financial investment and institutional development. High volumes of financial lenders and a strong stock market provide economic sustainability that provides for commercial business development and support from governmental leadership. The only legitimate risk in this dimension is that the majority of investment institutions stem from foreign markets and are not being developed by domestic financial institutions that would not be reliant on significant exchange rate differences that impact pricing for exported products. Secondly, Brazil has positive movement of capital across its borders triggered by rising interest in foreign direct investment into Brazil. The International Monetary Fund identified billions of dollars of investment moving into Brazil, including derivatives and new corporate capital development projects. The growth in capital movements into Brazil provide for a more enhanced distribution and supply infrastructure that will benefit Abercrombie and Fitch in relation to marketing expenses and retail center distribution. The risk in this dimension of international finance is that these improvements are private constructions not controlled by governmental regulators whereby a corporate pull-out of investment could limit the scope of infrastructure growth during a period where Brazil is working through a long-lasting economic recovery affecting domestic investment potential and opportunities. The third dimension of international finance relevant to Abercrombie is the regulatory system currently in place that guides economic policy. In the 1990s, Brazil was plagued with considerable inflation (approximately 15 percent annually) that caused a supplementary increase in utility costs, fuel and oil costs, and up to 25 percent interest on corporate and personal credit cards (Selva, 2010). The government has been more adept in recent years at changing index prices and employee wages as well as a variety of consumer price freezes to stimulate spending (Selva, 2010). Continuing governmental influence in economic policy and monetary stimulation tactics have reduced risks of ongoing inflation on the consumer price index that will provide A&F with a more stable consumer market where real wages are in-line with expectations for a consumer price index equalized with real GDP. The risk to this dimension of international finance is that not all efforts to curb inflation in certain supply sectors has been achieved, thus adding potential burden to supply budgets in a price-inflated value and supply chain. Brazil is currently the eighth largest economy in the world and is considered a developing nation that continues to attract foreign investment. Globalization, especially relevant in retailing, has placed Brazil on the social map as it pertains to foreign investment in upscale product merchandising. Brazil is now sporting fashions from major European fashion designers including Dior, Cartier, Bulgari, Marc Jacobs, and Luis Vuitton (Mazza & Stul, 2012). Growth in real consumer incomes sparked by governmental intervention and psychologically-based exposure to high quality and high priced fashion products has made this an attractive market for exportation and foreign direct investment by major fashion brands. This has the opportunity to reduce advertising and promotion costs to establish a brand recognition and brand recall with key profitable markets needed by A&F with markets that are already interested in high quality products that are distributed with premium pricing structures. This, much like the aforementioned movement of financial institutions into Brazil, builds a better distribution network and supply chain structure that could lead to significant supply cost savings by procuring from local sources in newly developed factories constructed by foreign investors. Currently, Brazil maintains a flexible, open float system which is actually a change from monetary policy in the 1990s and 2000s (Blanchard, 2005). In 2000, the country utilized a fixed exchange rate policy that, over the long-run, began to increase real interest rates and served to depreciate the currency that impacted GDP growth. Today, the open float system allows the government to be more active in making periodic adjustments to the exchange rate to stabilize economic conditions domestically (including wages, export pricing, etc.). In this crawling peg system, Brazil is able to remove exchange rate volatility by assessing the real-time value of a basket of international currencies (Startz, 2009). This monetary policy is beneficial for Abercrombie and Fitch that must procure the majority of its supply products from international or North American markets, thus importation becomes a cost issue with volatility and uncertainty. Having the open float system provides A&F with more pricing stability in the supply chain that improves operational efficiency related to costs. The most notable implication for the open float system in Brazil is that the government is considering the long-run sustainability of the Brazilian currency, thus making adjustments by the central bank that are most favorable for government revenue productions. Brazil is currently dependent on profit as a large exporter of petroleum and oil that is in significantly high demand internationally in a variety of buyer markets. The currency adjustments are closely related to profit expectations in a volatile commodity market, thus not directed toward retail and other consumer-related industries. Large-scale adjustments to satisfy governmental revenues could create additional inflation, reduce real consumer incomes, or make exportation by domestically produced A&F products undesirable if the government is attempting to create a form of economic parity with much more valuable international currencies. Brazil maintains a balance of payments surplus, meaning the country’s procurement of funds from exporting and bonds sales does not outweigh its expenditures for imports and bond purchases. The open float system has built more parity with a basket of international currencies, thus reducing some of the exportation losses that occurred previously in history in the retail and consumer sector. Even though the open float system was designed to satisfy profit expectations related to government-regulated exports (i.e. oil and petroleum), it has reduced significant trade imbalances that contributed to the high domestic interest rates experienced in Brazil in the 1990s. The balance of payments surplus was created by allowing the interest rate to be somewhat set by the market and market conditions, thus creating less volatility and more stability to make imports and exports more attractive to Abercrombie and Fitch. Under the open float system, changes to the currency are made incrementally, without establishing currency valuation against more volatile commodities such as gold (Startz, 2009). In 1996, 40 percent of the country’s Gross Domestic Product was devoured by significant inflationary rates in the consumer market (Selva, 2010). The diversity of the export and import market in Brazil would no longer allow for making domestic changes to index prices and real consumer wages, thus in order to create some form of economic equilibrium with international currencies, prize freezing was established in conjunction with a new open float system. This significant drop in inflation is what prompted more international interest in investing in Brazil as an export market by major European companies and upscale retailing as well as commodities markets. Currency stability with a basket of foreign currencies for major direct investment participants is significantly more valuable for establishing a pricing structure for merchandise with more predictable export and import values understood and more simplistic to predict. Potential losses through currency exchange for A&F exported products produced in Brazil will be more stable without massive price increases needed for European customers due to the ability of the government to establish new monetary changes in-line with current market conditions and participant currency values in real-time. Key financing opportunities for A&F include release of additional stock to improve capital position in a country where the stock market has been stabilized due to recent changes from the fixed system to the open float system. Ample market investment interest in securities exists in Brazil, as well as regular bond purchasing for retail organizations and many other industries not necessarily involved with retail and merchandising on the consumer markets. Financing can also be achieved by major lending institutions that have more presence in Brazil and are willing to provide ample credit at reasonable exchange rates due to recent government intervention in adjusting fixed rate methodologies. References Blanchard, O. (2005). Fiscal Dominance and Inflation Targeting: Lessons from Brazil, in Giavazzi, F., Goldfajn, I. & Herrera, S. (eds.) Inflation Targeting, Debt and the Brazilian Experience, 1999 to 2003. MIT Press. Mazza, Massimo & Stul, Fabio. (2012). What Companies need to Know about Brazil’s Luxury Consumers, McKinsey & Company. Retrieved November 1, 2012 from http://csi.mckinsey.com/knowledge_by_region/americas/brazil_luxury_consumer_retail_trends Selva, Ruban. (2010). A Short History of Inflation in Brazil. Retrieved November 1, 2012 from http://ezinearticles.com/?A-Short-History-of-Inflation-in-Brazil&id=3817254 Startz, Richard. (2009). Macroeconomics (11th ed.). McGraw-Hill. . Read More