Primark Going UAE and Not Entering Russia, Japan and Italy - Case Study Example

REPORT ON PRIMARK GOING UAE AND NOT ENTERING RUSSIA, JAPAN AND ITALY. By   Location Table of Contents Table of Contents 2 Introduction 3 REASONS FOR SELECTING UNITED ARAB EMIRATES AS THE NEW MARKET 3 SWOT ANALYSIS 5 Strengths 5 Weaknesses 5 Opportunities 5 Threats 5 APPLICATION OF THE SWOT ANALYSIS 6 ALTERNATIVE MARKETS REJECTED 7 Russia 7 Japan 8 Economic outline 8 Retailing sector 9 Italy 9 Economic outlook 9 Legal requirements 10 Other market factors 11 MARKET ENTRY STRATEGY 11 MARKETING MIX FOR PRIMARK 13 products 13 Price 13 Place 13 Promotion 14 REFERENCES 15 Statisics portal 2014, Italy: Gross domestic product (GDP) per capita in current prices from 2004 to 2014. Accessed from: http://www.statista.com/statistics/263595/gross-domestic-product-gdp-per-capita-in-italy/ 17 Introduction Primark is an Ireland based company that deals with a range of products with their main product being clothing (Primark 2015, p.1). The firm is currently operating in Ireland under the brand name Pennys. The company has multiple store in 9countries in Europe and recently opened a new branch in USA. The company wishes to open up a new branch in another country outside Europe and preferably not in America since a new branch was opened in Boston beginning of 2015. The firm has the option of opening branches in United Arab Emirates, Russia, Japan and Italy. The firm has a preference for UAE as the desired trading place for the new branch over the other three options. Various reasons based on the analysis of the potential markets formed a basis for the decision to establish a branch in UAE as discussed below. The product range offered by the firm includes: baby clothes, kids clothes, ladies’ wear, mens clothing, nightwear, beauty products and confectionery. REASONS FOR SELECTING UNITED ARAB EMIRATES AS THE NEW MARKET UAE is a Middle East country comprising of seven monarchies. The monarchies in the country are: Abu Dhabi, Umm al Qaiwain, and Ajman. They also include Fujairah, Ras al Khaimah, Sharjah as well as Dubai. To bring the monarchies together as one country and economic unit, there is a supreme council of rulers made up of seven Emirs to represent each of the kingdoms (BBC News 2015, p.1). With a population of over 9 million, the country has the potential of being a viable market to Primark products. A majority of this population is mainly foreigners. The country has a good environment for the operation of businesses. UAE is an emerging market with plenty of opportunities to be exploited. The viability of the market is evident from the increase in foreign direct investment to 10.5 billion dollars (Heritage Organization 2015, p.1). The flow of FDI is an indication of confidence in the market performance by investors. The country also has a low rate of inflation standing at 1.1%. A low inflation rate is good for the firm as the value of its investment will rarely decrease due to inflation. The country is ranked the highest in the region in terms of ease of doing business in the country with a score of 76.81 (World Bank 2014, p.8). The country also has one of the highest GDP in the world with a growth of 5.2 in the year 2014. The desire for reduction in dependence of oil revenue is a plus for firms wishing to start operating in the country (Trading Economics 2015, p.1). Reduction of oil dependence will see the country accommodate and support other businesses starting up in the country. The rate of unemployment is generally low measured to be at 3.6%. Low rate of unemployment is an indication of a productive economy. When the country has a low rate of unemployment, the majority of the able workforce is being utilized thus they have a source of income that can be spent on purchases of products and services. Trading in the free trade zone is an added advantage to traders as they are not subjected to any form of taxation. The benefits enjoyed by businesses operating in the free trade zone include 100% foreign ownership allowed, total repatriation of profit and capital, no import and export duties levied no restriction on labour force application (EMN Charter 2015, p. 1). Therefore, Primark is better off establishing a branch in UAE to enjoy the benefits of free trade zone. Furthermore, the corporate tax rate in UAE outside the free trade zone is the same for both local and foreign firms. The more income a firm makes the higher the taxation up to 55% for firms getting income of 5 million dirham and above (Santander 2015, p.1). This is favourable for Primark as it will not face any extra charges for being a foreign company, thus will be able to compete well with other firms in the market. SWOT ANALYSIS A SWOT analysis of the operating environment in Saudi Arabia for Primark will further evaluate the suitability of the market for the products. SWOT analysis is a tool for analysing internal environment for a business (Bohm 2009, p. 1). In this case, the environment to be analysed is UAE as a potential market for Primark. Strengths The area is a free trade zone It is easy to start up a business in the area Preference for personal selling Weaknesses Networking is very necessary to be able to expand Trust is to be established first before business transaction is conducted Opportunities Large export market Opportunities for trade missions Threats Natural calamities Entrance of competitors into the market APPLICATION OF THE SWOT ANALYSIS From the strength, it is evident that UAE is a good destination for Primark to open a branch. Free trade zone means the country has limited regulations as to how firms conduct business in the country as long as it is legal. Government does not control the flow of goods into and out of the country (Dunkley 2003, p.8). Limited control means Primark can import as much goods as possible to serve its new market, assuming that the goods are produced at the headquarters. The regulations for starting up a business in UAE are very few thus Primark will have an easy time going through the process before commencing operations. The steps required to set up a business are six after which the registration process is complete and the business is ready to operate. The Arabs prefer personal selling to online businesses. Thus, through opening up a branch in UAE, the firm can appeal to more customers in this area by coming closer to them. The weaknesses of the market however have to be addressed for the business to succeed. Networking is required before business begins. The firm will have to connect with the market and other layers in the market to be accepted by the consumers. Networking is necessitated by the culture of the UAE where people only do business with those they know. Respect for and understanding of the local religion is a factor that will aid the success of the business (World Business culture 2015, p.2). The people and the religion in UAE cannot be separated thus if a firm needs to reach to the people, appreciating the religion is also necessary. Earning the trust of the potential customers is another weakness that the firm will have to face. Being a worldwide recognized brand, the best way to win the trust of the people will be through provision of good quality and consistent products to the clients. Through personal selling, the firm can win as many customers as possible. The opportunities available for Primark include the large export market. Primark can make use of the outlet to be established in UAE as a centre for its exports in the Middle East. The UAE is growing to be a world market for cloths especially Dubai. By having a base in the area, the firm can expand its export business to the whole of the Middle East and parts of Africa. Establishing a branch in UAE is also an opportunity for the firm to expand its trade mission. Every firm would like to conquer wider markets and make huge sales thus the new brand is an opportunity to expand trading. The major threat to the business in the country is natural calamities which occur frequently. Sand storms are a common occurrence in the area since the country is in a desert leading to destruction of property. Losses from destructions can be avoided by taking an insurance policy to protect itself against such occurrences. Thus, the firm will incur extra costs of either taking an insurance cover or in the form of replacing property not insured and have been destroyed by natural calamities. Competition is another threat in this market. UAE is a prime market thus attractive to many firms and investors. Coupled with free trade in the country, Primark will be facing competition from existing firms and other new entrances in the market which may threaten the success of the business. ALTERNATIVE MARKETS REJECTED Russia Russia is the world’s largest country by surface area thus making it attractive for Primark as it has sufficient space and resources to put up a production plant (BBC News 2015, p.1). The economy of Russia was reformed after the collapse of Soviet Union but the reforms were not that clear as most wealth remained in the hands of a few officials. Thus, Primark will have a limited market in Russia since wealth is concentrated in the hands of few rich individuals. Dependence on export as the main source of income affects the economy of Russia significantly. The economy performs as per the rise and fall in international market prices especially of oil and gas, it main exports. This is evident in the average of 7% economic growth of the country between the years 1998 to 2008 when oil prices went up (Tass 2015, p.2). On the other side, the economic growth has been declining in the country since 2008 to date. The country was worse hit by the global economic recession in 2008 indicating it cannot withstand tough economic times. This is a warning sign to investors to avoid investing in Russia as they may lose most of their investment in case of a recession. With Russian invasion into Ukraine, the Russian economic development ministry forecasted an economic growth of only 2.5% annually with expected GDP being zero (Index Mundi 2014, p.1; World Bank 2014, p.1). Such a poorly performing economy is not suitable for Primark to invest in as there are very low chances of getting returns on investments made therefore Primark had to reject Russia as the alternative market. Japan Economic outline Japan is another possible market for Primark which was rejected. With a population of 127.25 million in 2013, Japan has a labour force of 65.02 million, which is about half of the population (Heritage org, 2015, p.1). The language of communication is basically Japanese which hinders foreigners from establishing businesses in Japan since 99% of the population speaks Japanese. The country has a per capita income of $39573, but a 13.5 % of the population being below the poverty line. This is an indication that the country is having a significant population being poor, thus will probably not be part of those willing and able to buy products from Primark. The deflation experienced in the country has attracted many investors into the country leading to excess foreign direct investment in the country amounting to $205.04 billion. However, the huge public debt is weighing down the economy (The economist 2015, p.2; the Japan times 2015, p.1). The entrance of Primark will therefore be of little significance in the market. The plan by the government to increase consumer tax will lead to increase in prices resulting in lower consumption (The economist 2014, p. 1). Retailing sector Most of Japanese exports go to china while Japan also imports goods from China, thus becoming a threat to Primark since it may face competition from Chinese cheap imports. The country also faces a negative population growth rate thus a majority of the population is comprised of elderly people. This will require Primark to change its target customers to mostly the elderly while employing the elderly people since they are the majority. Employing the elderly is a disadvantage as old people are not as productive as the younger generation. Though the country is well ahead of many countries in terms of technology, the space to construct the plants is limited. Most of Japanese land is forested thus the little available space is rented at a fortune. The people also have the culture of promoting locally produced goods which they take pride in as being their own. Thus, Primark has little chances of conquering the market due to the already existing pride in locally produced goods. Italy Economic outlook Italy is a southern Europe country whose economy is performing quit well. Since Primark is already operating in other parts of Europe, Russia is a good location for the branch. An analysis of the country will reveal both merits and demerits of doing business in Russia as opposed to other areas. First of all, Italy has a strong economic base with a per capita income of $37031 in 2011 (Statistics portal 2014, p.1). The per capita is one of the highest in Europe, thus making Italy a desirable business destination since the population has a good amount of money at their disposal as evident in the per capita income. Moreover, Italy is the 8th largest economy in the world and 5th largest in terms of purchasing power parity. Though the country appears attractive from the positive economic outlook, the down side of it leads to the rejection of the country as the alternative market. During the 2008 global economic crisis, Italy was the first country in the euro zone to be affected by the economic crisis facing up to 123% of the GDP as public debt. The huge public affected the economy negatively as the government could not pay up all the debt at once. Economic activities were affected negatively leading to decreased output (World Bank group 2015, p.6). There are also inefficiencies in the market affecting the overall business operations, including labour inefficiencies and tax evasion (Index mundi 2014, p.1). Tax evasion is a vice that leads to unfair competition in the market. Firms able to evade tax have the lowest operating cost than other firms in the same industry, thus will charge lower prices than its competitors. Primark is therefore likely to face unfair competition in Italy, deterring its success in the market. Inefficiencies in the labour market, reduce the qualified labour force that a firm can utilize in its operations. The country experienced a negative economic growth of -1.8% and the rate of unemployment being 12.8%. Youth unemployment was measured at 40%, which I quit alarming for businesses as it implies that the country has almost half of its youth without a source of income (EU Business 2014, p.2). Legal requirements The legal environment that would favour Premark operation in Italy is Italy’s membership to the European Union, thus the legal requirements of businesses are as per the European community laws. On the other side, legal requirements for operations within Italy are a bit restricted to businesses. All the labeling requirements must be met which include: name of the product, name and address of the manufacturer, packer, seller or importer in Italian, country of origin, ingredients in descending order of weight, metric weight and volume, additives by category name, special storage conditions and minimum shelf life date. The additional strict must adhere to labeling requirements come with additional costs to the firm thus not economical for Primark to operate from Italy. All goods for trade purposes produced locally and imported are subjected to value added tax while imports are subjected to custom duties. Duty rates and tariffs can also be changed without any prior notice to traders (Italy 2014, p.1). Other market factors The country has a large number of firms engaging in manufacturing and production of goods most being owned by families, thus are placed higher than foreign cooperation in the market. Though the process of registering is only five steps, the licensing procedure takes up to 3 months discouraging new entries. The labour laws are also rigid preventing competitive employment of the best employees. Primark is also most likely going to face stiff competition from Mantel, an Italian based fashion house that is already dominating the market. MARKET ENTRY STRATEGY Market entry strategy is the plan that the firm will use to enter a new foreign market successfully. There are several market entry strategies which may be utilized in the entry into UAE, including partnering, direct exporting, licensing, franchising, joint ventures, buying a company among others (Tielmann 2010, p.5). The best marketing strategy for United Arab Emirates is direct exporting. Direct exporting is where a firm produces goods in its headquarters and exports them to a foreign market for selling.The economic and legal environment in the country favours direct exporting. The taxation system in the UAE is favourable for foreign firms to establish in the country. With foreign firms being taxed the same way as local firms, a level playing ground is created for all firms. The free trade zone is another factor that can be utilized by Primark to enter the market since there are no taxation or import duties levied in this area. However, the free trade zone is limited in the market coverage as it allows firms to operate within the free trade zone only. Thus to avoid the limitation, the firm can opt for operating like any other foreign firm in UAE outside the free trade zone. Furthermore, the firm will enjoy the opportunity to expand its business through making UAE the centre for export trade in the Middle East. Being the economic heart of Middle East, UAE is a good location to have direct imports before distribution to other markets in the region as there is no limit to the amount of imports and exports into and out of the country. Lower inflation rates are also a factor that encourages direct exporting as the goods do not lose value on arrival in the new market. The risk profile of the firm refers to the attitude of the managers towards risk (Coyle 2005, p. 23). The risk attitude for Primark management can be said to be having a risk appetite. This is because of its move to look for investment in a totally new market. The firm had options of expanding its operations in the local markets at the headquarters or investing in other developed countries. The choice of investing in UAE is an indication of a risk taking firm. The cultural difference between Ireland, the country of origin of Primark, and UAE is so huge that the products sold will have to be adjusted significantly to suit the market. The changes come with additional costs that may never be recovered. However, acceptance of the products by the locals will earn the firm good profits thus the risk is worth taking. MARKETING MIX FOR PRIMARK Marketing mix refers to the planned combination of elements in marketing a product (Bowman & Gatignon 2010, p.13). The elements are product, price, place and promotion. products A product refers to what the customers’ needs. The products of the firm should satisfy consumer needs for any significant sales to occur. According to Lamb, Hair and McDaniel 2012, the product includes the actual product, packaging, the brand and value. With increasing fashion conscious by the population, a touch of the latest fashion has to be visible in the product to satisfy market demand. The weather conditions also dictate the product design. Due to the hot conditions experienced in UAE, there is need for seasonal clothing especially for the hot weather. Price The price of the products should not be so high. Due to the presence of other retailers in the country already, charging too high prices will see customers shift to the competitors’ products. Being a developing nation, the disposable income for the population is limited thus the need to minimize prices. Pricing can be used as a strategy to attract clients while maintaining good quality (Kitchen 2005, p.219). This will need a balance between quality and price so that the firm does not offer lower prices at the expense of quality. Place Accessibility of the product by consumers determines sales of the firm. With the emergence of retail outlets and shopping malls in UAE, most shoppers have shifted to visiting the shopping malls. UAE is the second highest ranking country in retail development (AT Kearney 2013, p.2). Thus, the trend is the shopping malls thus opening in a shopping mall is the best way to succeed. Promotion This refers to the actual means to be used to convey information about the product to the customer (Chandrasekhar 2011, p.8). Based on the culture of UAE, the personal selling is best suited for promotion purposes. Use of promoters will be successful as the culture of the UAE prefers personal selling to online business. Thus using sales persons to market products in the field to the people will boost the sales of the firm as the people will feel appreciated due to adoption of their culture. Other marketing techniques can also be applied to reinforce personal selling including mass media adverts, social media, posters and promotions. REFERENCES AT Kearney 2013, China is Ranked #1 in the A.T. Kearney 2013 Retail Apparel Index followed by U.A.E. and Chile. 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