John Lewis in the United Arab Emirates - Case Study Example

Introduction

Founded in the year 1864 in Oxford London, John Lewis is a chain of 48 departmental stores across the U.K that are owned and operated by the 88,900 members of the John Lewis Partnership (Paranque, and Willmott 2016). Over the years John Lewis has grown to become one of the U.K's leading upmarket departmental stores with outlets in Wales, Scotland, and England.

It also operates 12 flexible formats and at home stores in York and Exeter (Paranque, and Willmott 2016). The success of the store is largely due to its expansion strategy which has enabled it to dominate the U.K retail sector. In order to continue its effect and protect itself from the effects of the Brexit, the company has embarked on an expansion strategy into the international markets and seeks to venture into the Saudi Arabian retail sector.

Saudi Arabia is the second largest state in the Arab world it has a population of 28.7 million people of which 20 million are Saudi nationals, and the remaining 8 million people are foreigners (Niblock 2015). The country has a nominal GDP of $653.219 billion and a per capita income of $20,812 (Niblock 2015).

The Saudi government decision to ease restrictions on foreign direct investment in the country has lead to a boom in the retail sector as a significant percentage of the population has the disposable income to keep spending amid the decline in oil prices (Niblock 2015). This makes Saudi Arabia the best country for John Lewis to expand to as the retail sector is just beginning to develop.

As indicated above, the Brexit decision that was reached by the U.K has had tremendous effects on the U.K economy (Begg, and Mushövel 2016). The value of the pound has dropped to a thirty year low with major firms like John Lewis and Easyjet reporting that the slump in the sterling pound has increased their operational costs (Begg, and Mushövel 2016).

The country has also lost its AAA credit rating, and this implies that government borrowing cost will be much higher (Begg, and Mushövel 2016). In order for John Lewis to mitigate the effects of the Brexit decision on its operations, the company has decided to expand into other international markets that offer a promising outlook.

SWOT Analysis

Strength

One key attribute that will enable John Lewis to excel in its expansion into Saudi Arabia is its strong brand image. The firm has managed to successfully build a strong brand image for itself, and in 2008 its Oxford store was awarded a Royal Warrant from the Queen (Knowledge 2016).

The firm's brand image has made it extremely popular among U.K citizens, and thus it will be easy for it to win over the 26,000 U.K expatriates residing in Saudi Arabia (Begg, and Mushövel 2016). This will help the company minimize its marketing cost as it already has a significant expatriate population in Saudi Arabia that is familiar with their services. The large expatriate base will also provide the firm with a steady stream of customers while it seeks to stabilize itself in the Saudi retail market.

Strength for the company is in the fact that since 2001, the company’s profits have been growing steady and the firm has managed to develop a strong cash position for itself after a decade of enormous financial growth (Knowledge 2016). This is very important for the company’s expansion program as it ensures that the company has all the resources that it would need to effectively venture into the Saudi Arabian retail market.

Financial positions play a very significant role in the international expansion of companies as it helps the company to be able to effectively promote themselves and their products in a foreign country. It also enables corporations to set effective operational structures.

John Lewis also has a very strong online presence with a well developed online retail platform that even provides international deliveries (Knowledge 2016). The experience that the John Lewis has acquired through its online presence will significantly aid it in its expansion into the Saudi Arabian market as online retailing in Saudi Arabia is currently booming.

The rapid growth of internet retailing in the country is fueled by the increasing rate of internet penetration which as at 2015 stood at 72% of the entire population (Orloff 2012). Internet sales in the country are expected to increase further with the increase in the population and improvement in methods of online payment in the country (Orloff 2012). The company also offers an extensive product range and carries a diverse range of fashion brands that the client can choose from.

This is extremely beneficial for the company as Saudi Arabia is regarded as one of the major consumers of high-end products (Niblock, 2015). This implies that the company will have a strong market for most of its upmarket consumer products therefore resulting in an increase in its sales.

The last attribute that will enable the company to effectively venture into the Saudi Arabian market is the fact that the company has a highly competent management team which has received numerous praises for revising the company’s fortunes during the last decade (Knowledge 2016). The knowledge and expertise held by the management team will enable the company to effectively maneuver through any challenges that it may face in its expansion project.

Weaknesses

The major weakness that is facing the John Lewis is the lack of any international business experience. Ever since its inception John Lewis has only operated in the U.K and most of the problems it has faced are problems related to the domestic market (Knowledge 2016). The firm has no experience on how to manage and run an international corporation and this will significantly inhibit its ability to perform effectively once it has expanded into Saudi Arabia.

In order to mitigate the effects that this weakness may have on the company, it is recommended that the company recruits the services of a manager who has experience in managing international businesses.

Another major weakness facing John Lewis is the lack of any competitive advantage over its competitors. This means that the company has no unique selling point over its competitors and will have to rely heavily on the consumer's decision to either buy from it or not. This is also a very significant weakness for John Lewis because its competitors in Saudi Arabia will have a competitive advantage over the firm in the year being local brands and hence shoppers will identify more with them than they do with John Lewis.

After the Brexit vote, the price/earnings ratio of the firm reduced to 9.4 (Begg, and Mushövel 2016). This is lower than that of its competitors and an indicator that investors are losing confidence in the company. This implies that investors in the company may be unwilling to fully support the expansion program.

The Brexit vote has also led to an increase in the company’s operational cost (Begg, and Mushövel 2016). This resulted in a decline in its profit margins and hence the firm may not be able to effectively fund the expansion project into Saudi Arabia.

In order to survive in the harsh economic conditions that are currently in the U.K, the company has been forced to start cutting its prices so as to match those offered by the competition and drive consumers into the department stores. This is a major weakness for the firm as it may devalue the brand.

Opportunities

The expansion into Saudi Arabia is a major opportunity for John Lewis as it presents it with the opportunity of acquiring a new clientele base and hence increasing its profit margin. This will be a major opportunity for the firm to increase its products as a study into the consumer market in Saudi Arabia indicate that consumers in the country already have an affinity with international brands hence it will not be difficult for the firm to sell its products in the country (Niblock, 2015).

Another significant opportunity for the firm in the expansion process is the fact that internet penetration in Saudi Arabia is drastically increasing and this has lead to an increase in online retailing (Orloff 2012). The company, therefore, has the opportunity to utilize its years of experiencing in online retailing in the U.K and dominate Saudi Arabia’s online retailing sector. Also, the margins associated with online retailing in Saudi Arabia are higher as seen by the extensive growth of Amazon in the Saudi online retailing sector.

Another opportunity for John Lewis lies in the purchasing power of Saudi citizens. Saudi Arabia is among the world’s wealthiest nations, and its citizens have a lot of disposable income to spend. This implies that the company has very big opportunities of making significant sales while operating in Saudi Arabia than in the U.K.

Another opportunity for John Lewis is in the adoption of healthy lifestyles by a significant percentage of Saudi Arabia citizens. This provides the firm with an opportunity to start selling sports gear and healthy foods. This new category of products will distinguish it from its competitors and serve to significantly increase its sales in the market.

The new legislation’s regulating foreign direct investment in Saudi Arabia also provide the company with the opportunity of effectively setting up an operation in the country and competing with the local firms.

Threats

The major threat facing the company in its expansion program into Saudi Arabia is the threat of failure due to cultural differences that exist between the U.K and Saudi Arabia. The company has no experience on how international businesses are managed and thus it may not be able to navigate through the cultural differences or other problems that may emerge as a result of the expansion, thus may leading to failure. Another threat facing the company is that after the Brexit vote, the company has been experiencing cash flow problems (Begg, and Mushövel 2016).

This implies that the company may not have the resources that it needs to effectively execute the expansion into Saudi Arabia thus leading to a failure of the expansion project or making the expansion not as effective as it ought to be. The relaxation of foreign direct investment in Saudi Arabia has also opened up the market for other international retailers with experience like Amazon and Lulu Hypermarkets (Niblock, 2015).

This implies that John Lewis will be faced with the very stiff competition when it expands into Saudi Arabia. The final threat to the expansion is that government regulations by either the Saudi or U.K government may impede the company’s ability to operate in the country effectively.

PEST Analysis on Saudi Arabia

Political

Unlike most other Arab countries, the Saudi Arabian government has set in place business-friendly regulations aimed at driving foreign direct investment into the country. The move has been extremely successful with a lot of international companies expanding into the country. The regulations have helped boost investor confidence in the country and enhance the country’s economic growth. The regulations also make it easy for companies like John Lewis to open and operate branches in the country.

The country’s Monarchial system of government has enabled it to experience years of peace and prosperity, and there have been very little incidents of political risk in the country (Niblock, 2015). This means that the funds that investors put into the country are safe from the risks associated with political risks.

Economical

The discovery of oil in 1983 has enabled the country to become one of the wealthiest nations in the world (Niblock, 2015). The country has also embarked on campaigns to diversify its economy which is regarded as a capitalist economy meaning that it is easy for the organization to set up operations and compete effectively in the country without any fear of interference from the government (Niblock, 2015). The wealth status of the country also means that the country's residents earn enough to have the disposable income to spend thus creating a ready market for John Lewis’s products.

Social

The country has a strong adherence to Islamic values and the maintenance of stability socially in the context of enhanced economic growth is consistent growths for the Country’s development plans (Niblock, 2015). It also has very strong religious values.

In order for John Lewis to survive in Saudi Arabia it has to pay attention to the countries social practices; therefore the company should not sell any form of alcohol as most Saudi residents will not go into an establishment that sells alcohol (Niblock, 2015).

Technology

Even though the internet was introduced in the country during the year 1999, Internet growth rate in the country by the end of 2000 was 3750%, and the country is expected to achieve 100% full internet connection by the year 2020 (Orloff 2012). This implies that there is a huge opportunity for the exploitation of online retailing in the country as the market is expected to grow exponentially with increase in the level of internet penetration across the country (Orloff 2012).

Conclusion

It is logical to point out that even though John Lewis is likely to face a lot of challenges in its expansion program to Saudi Arabia, the expansion is more likely to be profitable to the company because of the vast opportunities in the Saudi market.

The economic challenges facing the company in its home market and the expected slowdown in the U.K economy as a result of the Brexit are all factors that point the need for the company to expand. However, the company should first invest in the services of a manager with experience in running an international business as this will play a significant role in determining whether or not the company will succeed.