A Case Study of Abercrombie & Fitch Entry into the Brazilian Market - Research Paper Example

A Case Study of Abercrombie & Fitch Entry into the Brazilian Market Introduction Getting into the international market or expanding to other markets in the global economic spectrum is never an easy task for businesses. Any business going abroad should decisively identify and set strategies geared towards limiting and if possible eliminating risks that may be encountered in the process. Research defines the main instrument by which businesses can spot opportunities and risks existing in the target market. Some foreign markets may appear attractive with good incentives and tax holidays, when the true condition on the ground is poor consumer behavior towards newly arriving products or businesses. Some may also depict law costs of production characterized by cheap power, raw materials, labor and transport, but with very high tax rates and strict laws for involvement in social corporate responsibilities. Since Abercrombie and Fitch is one of the multinational companies forecasting to open and expand new market in the rapidly growing and stabilizing Brazilian economy, it must first consider understanding various risks likely to occur in its foreign mission in Brazil. Risk of Foreign Currency on Operations of Abercrombie & Fitch Foreign currency risks involve risks accruing from the periodical fluctuations in the value of the foreign currencies. One type of financial risk accruing from fluctuation in foreign currencies, and likely faced by Abercrombie and Fitch is the transaction risk (Mullineux, 1987). Exporters and importers are the likely business people to experience such risks, as they need to deal with different currencies to stamp their trading. The risks likely faced by exporters involves fall in the value of the local currency in the foreign market as at the time of product arrival and making of payment by the foreign importer. When this happens, the foreign importer will have to convert the payment in consistence with the prevailing transaction and not with initial value as at the time ordering for the product. This then translates into substantial profit for the importer and loss on the side of the exporter. To the importer, foreign exchange risk may occur when the foreign currency of the exporter gain value over the local currency as at the time of receiving goods and making payment. In this situation, the importer will have to more monetary value of the local currency to pay for the goods received (Mullineux &Murinde, 2003). Under this situation, exporters tend to benefit from the extra payment resulted by flux in the value of currency as importer the individual importer make losses. However, importers may have other avenues to service such losses by passing the loss to the final consumer in the final pricing. This may only be possible if the importer has no competitors who also deal with same product, or when all the importers experienced similar impacts of currency fluctuations as at the time of importation. Another foreign currency risk likely faced by Abercrombie and Fitch in the course of doing business in a foreign country is the translation risks (Mullineux & Murinde, 2003). A foreign company running its operations in another country usually records and recognizes its revenues in terms of its home currency. Challenge occurs during preparation and development of the company’s balance sheet that deliberates liabilities, capital and assets. In this process of balance sheet, the foreign company needs to express its financial values in terms of the local currency and not in its home currency. This result to unreal expressions in the financial report presented to the government of the host country for determination of tax margins. For example, Abercrombie and Fitch is an American multinational company that will denominate its proceeds in US dollars and not in Brazilian currency. When reporting its financial performance to the government of Brazil, in which process it will have to express the values in terms of Brazilian currencies, the financial value of the business may appear more to attract high tax margins. Currency risks in the international market and the likelihood of Abercrombie & Fitch facing them cannot disallow the company to expand to Brazil. The success of the expansion forecast can be possible through critical identification of the challenges and establishment of benchmarks to help cushion the company from losses accruing due to the rise of such challenges. One way to achieve triumph over the challenge presented by transaction risks involved with foreign currencies is the prior decision to initiate the expansion that limits otherwise exportation of the products from either US or any subsidiary branch to this destination. Another way of avoiding the transaction risks is through focusing on the local market and not involve in any export activity. It is possible that certain customers in the local market, who also conduct international trade, will order for supply of goods to the foreign market. The company should totally desist from any trace of international trade and focus particularly on local dealing within the local market. To deal with the translation risks, the company will have to price its products in the local currency, which should be in direct correlation with costs of production within the local economy. Calculation of the sale proceeds should also be in terms of the local currencies to reduce perceived shocks during preparation of financial statements used by government to determine taxation margins. Functions of International Banking System and Financial Markets International banking system plays numerous roles and purposes in the effectiveness of the international trade. International banking system defines neutral ground that determines as well as communicates fluctuation of currencies in various countries (Mullineux & Murinde, 2003). International banking system also plays the role of lending and borrowing financial assets for the savers and to the investors and consumers. Moreover, international banking system also helps in the safeguarding and spreading of possible risks that may hurt the economy of given country or international business. International banking system also defines the best pool for businesses to locate customers and markets for their products. Furthermore, international banking system provides avenues for the interrelation of markets such as underlying and derivatives. Additionally, international banking system assists asset holders and buyers in efficient location of thick markets (Mullineux, 1987). According to Colombo (2003), financial markets are financial institutions or organizations that bridge the gap between the savers (lenders) and spenders (borrowers). In other words, financial markets are places for trading of equities, currencies, bonds, stocks, and derivatives among others. Players in the financial markets involve banks, insurance companies, finance companies, and mutual funds among others. Financial markets perform various functions that are critical for the development of and stabilization of businesses as well as generation of interests and money value for the savers. Among the main functions of financial markets, include lending and borrowing of money (Colombo, 2003). Lending occurs when the agents in the financial markets receive savings from either households or businesses. They in turn borrow the saved monies to borrowers for the purposes of either investment or consumption. Another function of financial markets is determining prices of financial assets and stocks. As observed by Bailey (2007), financial markets also facilitate coordination and assimilation of information regarding the values of finances and assets in the given economy. Financial markets also facilitate sharing of risks involved in business transactions among several players in a given enterprise. Additionally, financial markets help in facilitating efforts by asset holders to liquidate their assets in the financial market (Bailey, 2007). Abercrombie and Fitch can effectively take advantage of the financial markets to solicit funds for financing its global operations. To generate the funds, Abercrombie & Fitch can decide to postpone or delay the payment of equities to the shareholders and use the funds in servicing the capital need for its operations. Abercrombie & Fitch can also use the financial markets to locate bonds offered by governments and other companies to meet its demand for monies to fund foreign operations. In addition, Abercrombie & Fitch can also borrow loans from banks and other financial institutions and use the proceeds in addressing probable financial constraints likely to compromise its global business operations. Financial Strategy to Support Long-Term Financing of Operations in a global Market The best way in which Abercrombie & Fitch Company can enter into the Brazilian economy is through foreign direct investment technique. This method should entail acquisition of an already existing and related company in Brazil. Through this system, Abercrombie & Fitch will be able eliminate other issues that may involve purchasing of machines and business lands or premises, that may entirely be expensive. The challenge may to this expansion technique may only involve financial constraints considering the political and economic will expressed by the government of Brazil intended to attract investors. Abercrombie & Fitch can overcome the financial constraints by increasing the equity value of shareholders and convincing shareholders to buy more securities. When this succeeds, Abercrombie & Fitch will be able to raise significant amount of money capable to support long-term financial needs for the running of the business. Another possible source of finance for Abercrombie & Fitch to support long-term financing of its foreign operation in Brazil is borrowing from the Brazilian banks. This is due to the lower interest rates charged by the Brazilian banks, which one of the strategies by the Brazilian government to attract foreign investors. Final Recommendation Abercrombie & Fitch can easily fulfill its mission to expand operations to Brazil. This is possible from various factors like international finance, impacts of globalization, monetary systems and Brazilian economic trends, which appear to favor operations of Abercrombie & Fitch. The fluctuation in the foreign currencies, which is the main challenge under international finance, is manageable and risks are deductible if not avoidable. Favorable business environment as promised by the Brazilian government that intends to manage its currency and protect it from extreme external problems is another opportunity defining profitability of operations by Abercrombie & Fitch in Brazil. Globalization also influences positively on Abercrombie & Fitch Company. This is due to the continued spread of Western culture and practices in Brazil. This will ensure easy acceptance and consumption of products, which usually goes with the trend and fashions in the Western countries. The detected efforts by Brazilian government to protect its currency from the external changes are also critical in relative pricing as the practice by the government eliminates inflation and deflation of the economy. This has entire effect of ensuring consistency in the cost of operation and profits. References Bailey, R. E. (2007). The economics of financial markets. Cambridge [u.a.: Cambridge Univ. Press. Colombo, E. (2003). The role of financial markets in the transition process : with 46 tables. New York: Heidelberg Publisher. Mullineux, A. W. (1987). International banking and financial systems: A comparison. London: Graham & Trotman. Mullineux, A. W., & Murinde, V. (2003). Handbook of international banking. Cheltenham, U.K: Edward Elgar. Startz, Richard. (2009). Macroeconomics (11th Ed.). New York: McGraw-Hill Publisher. Read More