Recommendations for Market Entry in India (Gap Inc.) - Essay Example

Gap Inc. International Expansion & Environmental Conditions Report – Recommendations for Market Entry in India BY NATALIE ACADEMIC ORGANISATION Word Count: 1,630 (+8%) "Gap Inc.s heritage is based on connecting with people through great style and experiences – and by making cultural connections along the way." Robert J. Fisher (Chairman, Gap Inc.) Summary of Market Research - India Limited growth opportunities within domestic markets have forced many retailers to expand their operations to global markets (Moon, 2005). Gap Inc. has reported disappointing financial performance for 2005, having experienced an overall 2% loss in revenues during last year (Gap Annual Report, 2005) and a continuous 1% year-to-year fall in sales from domestic operations (Lim, 2006). Despite these sobering setbacks, Gap Inc.s most recent, noticeable accomplishment was the firms commitment to introduce its brands to international markets. Further, in 2005 the company developed an international franchising capability, allowing Gap brands to enter smaller, more fragmented markets in the pursuit of recapturing lost sales revenues through expansion efforts (Gap Annual Report). With Gap internally equipped to tackle the tremendous challenges of internationalisation, the company has inquired as to the feasibility of introducing its substantial lines of fashion apparel into the developing Asian nation of India. However, before assuming the risk of securing a broadened international presence, the dynamics of environmental conditions in India must be identified before a forward plan of market entry can be formulated into a viable business strategy. Burt & Sparks (2002) suggest that barriers to successful retail international operations exist primarily in respect of the macro environment; differences in consumer characteristics and behaviours as well as the nature of existing competition. This report highlights a wide spectrum of external research including logistical analyses, consumer attributes, analysis of competitor behaviours as well as local and governmental regulations within India. The results of this research will indicate whether India is a suitable market for expansion and indicate whether Gap Inc. is ready to exploit this potential opportunity for growth. Indian Consumer Attributes There are many similarities between consumers worldwide but, equally, there are many differences in culture, language, and brand points of reference (In Store, 2006). India maintains 35 states and union territories – each with its own language, culture and habits – and is very similar to the European union (Biswas, 2006). For contemporary Indian consumers, it is a matter of perceived product quality and, in some instances, heritage, which makes them adopt faith in top brands (Banerjee, 2006). Market research suggests that Indian consumers do not consider product origin in assessing product consumption so long as the products deliver. This evidence suggests that Gap Inc., and its strong foundation of quality, iconic brands, can cater to an active Indian consumer population both willing and capable to support the growth of Gap. Morever, in sharp contrast to the aging populations of the rest of the world, 54 percent of Indias population is below 25 years of age (Biswas). With the majority of Gap clothing targeted toward the youthful consumer audience, India maintains an ideal younger market which is more likely to identify with Gap and its image on quality clothing, affordability and fashion forward appeal. A rather unique aspect of the Indian market is that Indian men are more interested in their appearance than women. Research suggests that the average Indian male spends about 20 minutes in front of the mirror each morning (Biswas). Gap Inc. has recently introduced a personal care line through its exclusive partnership with Inter Parfums, Inc. and is experiencing a tremendous domestic consumer following of this line. The companys recent expansion into personal care and grooming products offers Gap an opportunity to exploit these opportunities offered through distributing an innovative line of grooming products designed for Indian men. Indias Infrastructure When it comes to contemporary business, it is often said that the firm with the best supply chain emerges victorious, regardless of the nature of the specific industry (Sowinski, 2005). India currently maintains limited highway systems and substantially deteriorating railways, which serves to impede the overall transportation of merchandise as well as limit the size of the loads that trucks can carry (Biswas). For this reason, the Indian government has pledged to invest significant financial resources in order to develop a sustainable infrastructure. Currently, however, competitive industries which have invested in international operations in India are reporting high logistics costs and often unavoidable business interruption due to delayed deliveries of product. Competition Once a retailer decides to enter a foreign market, it must prepare to combat foreign competitors in an unknown market environment (da Rocha & Dib, 2002). Indias fastest growing sector is currently the supermarket and hypermarket concept which is currently saturated by various competitors. The clothing market, in contrast, maintains tremendous growth potential for foreign investment and is marked by substantially low levels of U.S. and European competition. It was only in 2005 that the Indian government eliminated quotas on foreign imports, allowing retailers to actively pursue the Indian market as an opportunity for more concentrated exportation of merchandise. This change in foreign policy is opening opportunities for clothiers to consider India a viable growth strategy. Labour Pool and Franchising With Gap Inc. moving into franchising opportunities, an analysis of the Indian business environment is vital to determining whether a franchise can effectively thrive on foreign soil. Though Indias population exceeds a billion people, it is still largely a rural country and English-speakers with business and accounting degrees are a small fraction of the population (Bjorke, 2006). The success of franchises rests on the managerial and leadership competencies of those individuals who pursue a business relationship with Gap Inc. There is currently a severe shortage of talented professionals in India, true in almost every area of the retail sector – technology, supply chain, business development and product development. Further, because of this shortage, retailers are forced to hire associates aggressively, adding increased pressure on wage costs and operating margins with foreign firms that have invested in the Indian market. This problem is estimated to escalate as the demand for competent workers increase over the next several years (Biswas). Currently, efficient labourers are in extremely high demand, thus these experienced individuals are commanding above industry-average wages in exchange for loyalty to their employer. Risk Assessment Fraud and theft, including employee pilferage, shoplifting, vendor frauds and basic operational inaccuracies (often due to language-related communication breakdowns) currently cost the Indian retail sector approximately U.S. $120 million every year; and insuring against this particular type of risk exposure is quite difficult and substantially expensive (Biswas). The data supplied regarding these risks suggests that a routine, comprehensive risk assessment must be conducted as part of the foreign operational strategy, both prior to market entry as well as after the foreign facility has been established in India. Market Entry Farra et al (2006) suggest that two out of three retailers fail outside of their domestic market, often due to poor timing of market entry and the tendency to simply clone a tried-and-tested business format. Literature indicates that there is generally only a five year window of opportunity to enter an emerging market, and to miss that window of opportunity can quickly saturate the region with competition. Further, industries must recognise that they are facing an entirely different foreign socio-cultural market environment which will indicate the appropriateness of various, previously-successful marketing tactics. For this reason, it has been suggested to enter the foreign country a few years prior to anticipating sales growth from the region so as to become acclimated with the local culture and recognise consumer differences. Conclusion As is clear from the market research data, there are tremendous opportunities for growth in the retail sector in India. Positive consumer attitudes toward Westernised products as well as the sustenance of a suitable contemporary consumer market make India a viable region to exploit in pursuit of international business expansion. However, it should be recognised that the majority of this market research evidence is lacking considerable primary professional testimony specifically regarding the Indian clothing market as this region is a relatively new opportunity for foreign investment. Further market research regarding cultural expectations and Indian consumer spending data would serve to supplement this research. Further, evident obstacles to market entry in this region are categorised by a fledgling infrastructure and obvious impediments to the potential supply chain and distribution network and would be significant challenges to achieving immediate success in this market. A more detailed research analysis of the potential logistical opportunities or weaknesses, such as receipt of a detailed highway and railway system map would be beneficial in determining a valid solution to the problems with distribution. There are further risks as related to currency fluctuations, local taxation and tariffs as well as intellectual property protection legalities which should be addressed before a final entry decision is formulated. Recommendations It is recommended that Gap Inc. take immediate advantage of this market opportunity in order to secure Indian consumer loyalty to Gap brands prior to competitor market entry; which will likely escalate with the removal of Indian import quotas. Gap Inc.s strengthened balance sheet and debt reduction activities leading to U.S. $3 billion in cash and investments (Gap Annual Report) suggests that the company can adequately support the demands of higher logistics costs and employee compensation demands within this region. When retail companies consider additional retail expansion they are faced with a variety of options for market entry: that is, acquisitions, franchising or joint ventures (Quinn & Alexander, 2002). Due to the obvious drawbacks in securing local talent to effectively operate franchise facilities in the short-term, it is the recommendation that Gap Inc. consider foreign direct investment as an appropriate option for initial market entry. Direct corporate investment will accomplish two distinct objectives: First, to familiarise the firm with local culture and consumer preferences in order to customise product offerings to this community and, secondly, to establish a strong regional leadership team competent to thrive within the Indian economy. Bibliography Banerjee, Rajiv. Sep 22 2006. India. Media. Hong Kong. p.75. Biswas, Ranjan. May 2006. Indias Changing Consumers. Chain Store Age. Vol. 82, Iss. 5, p.A2-A6. Bjorke, Christopher. Sep 2006. India Arrives. AFP Exchange. Bethesda. Vol. 26, Iss. 7, p.33-34. Burt, Steve L. & Sparks, Leigh. Fall 2002. Corporate branding, retailing, and retail Internationalisation. Corporate Reputation Review. London. Vol. 5, Iss. 2/3, p.196-199. da Rocha, Angela & Dib, Luis Antonio. 2002. The entry of Wal-Mart in Brazil and the competitive response of multinational and domestic firms. International Journal of Retail and Distribution Management. Bradford. Vol. 30, Iss. 1, p.62-66. Farra, Fadi, Kearney, A.T. & Bell, David. 2006. Globalisaton strategies: How to crack new markets. European Business Forum. London. Iss. 25, p.40-43. Gap Inc. 2005. Company Fact Sheet. http://www.gapinc.com/public/documents/GPS_factsheet.pdf Gap Inc. 2005. Annual Report. http://www.gapinc.com/public/documents/GPS_AR_05.pdf In Store. Aug 10 2006. Special Report: International Recognition. p.25. Lim, Kevin. Aug 2 2006. Gap to Open First Store in Asia Outside Japan by End of Year. Wall Street Journal. New York. Reprint. Moon, Soo-Young. Sep 2005. An Analysis of Global Retail Strategies: A Case of US Based Retailers. Journal of American Academy of Business. Vol. 7, Iss. 1, p.220. Quinn, Barry & Alexander, Nicholas. 2002. International retail franchising: A conceptual framework. International Journal of Retail & Distribution Management. Bradford. Vol. 30, Iss. 5, p.265. Sowinski, Lara L. Oct 2005. Right on Target. World Trade. Vol. 18, Iss. 10, p.28. Read More