LEEDS METROPOLITAN UNIVERSITY

Global Marketing Summative Assignment, Semester 2, 12/13

BA (Hons) Marketing

Todd Bullions | 33241600

Submission date: 14th May 2013 Word count: 4,500

Assessor: Jon James

2 | P a g e

Contents 1.0 H&M Company Profile ........................................................................................................... 1

1.1 H&M Company History........................................................................................................... 1

1.2 Brand Portfolio ....................................................................................................................... 1

1.3 Resource base ........................................................................................................................ 1

1.4 Operations ............................................................................................................................. 2

1.5 Markets Served ...................................................................................................................... 2

1.6 Markets under development .................................................................................................. 3

1.7 Channels to Market ................................................................................................................ 3

1.8 SWOT Analysis ....................................................................................................................... 3

2.0 H&M’s Development into non-domestic markets ................................................................... 4

2.1 The Uppsala Internationalisation Model ................................................................................. 4

Fig 1.0: The Uppsala Model applied to H&M’s Development into non-domestic markets ............ 4

2.2 EPRG Framework ................................................................................................................... 6

2.2.1 Ethnocentric (1947-1965) .................................................................................................. 6

2.2.2 Regiocentric (1964-2001) .................................................................................................. 6

2.2.3 A Geocentric Transnational (2001+) .................................................................................. 6

2.2.4 A Geocentric Future? (2013+)............................................................................................ 7

Fig 2.0: The Uppsala Model applied to H&M’s Development into non-domestic markets ............ 7

3.0 Analysis of the Brazilian fashion retail industry....................................................................... 8

3.1 12C Framework........................................................................................................................ 8

3.1.1 Country ............................................................................................................................. 8

3.1.2 Concentration ................................................................................................................... 8

3.1.3 Culture/Consumer Behaviour ............................................................................................ 8

3.1.4 Channels ........................................................................................................................... 9

3.1.5 Caveats ............................................................................................................................. 9

3.2 The Macro-environment .......................................................................................................... 9

3.3 Porter’s Five Forces – The Micro-environment ....................................................................... 10

Fig 3.0 Forces driving competition in the apparel retail industry in Brazil, 2012 ........................ 10

3.3 Assessment of the Brazilian apparel retail market .................................................................. 11

Fig 4.0 Relative product prices ................................................................................................. 11

4.0 Relevant Market Entry Modes .............................................................................................. 12

4.1 Export Mode – E-Commerce .................................................................................................. 12

4.2 Intermediate Mode - Franchise .............................................................................................. 12

3 | P a g e

4.3 Appropriate Entry Mode - Hierarchical Mode – Greenfield Investment – supported by e-

commerce. .................................................................................................................................. 13

5.0 Final summary ..................................................................................................................... 14

Bibliography ....................................................................................................................................... i

Appendix 1: Key Company Information ............................................................................................. iv

Appendix 2: H&M’s expansion into non-domestic markets ................................................................ v

Appendix 3: Growth of Online Retail in the Developed World ........................................................... vi

1 | P a g e

1.0 H&M Company Profile Founded in 1947, in Stockholm Sweden, Hennes & Mauritz (H&M) has grown to be the world’s

second largest fashion retailer (Chu et al, 2012) with recorded revenues of SEK140,948m

for the financial year ending November 2012 (H&M, 2013).

H&M’s product portfolio consists of; “affordable fashion apparel, cosmetics, accessories and shoes

for women, men, teenagers and children” (MarketLine, 2012). Their position within fashion retail has

been solidified by their substantial globalisation strategy (ibid, 2012). This strategy has given the

organisation a presence in 43 markets which is supported by over 2,300 stores worldwide (H&M,

2013). H&M also offer an online retail operation in eight of its key markets (Fleming, 2013). H&M’s

ambition for growth is not wavering, with newly published growth targets of increasing their number

of stores globally by 10–15% per year (H&M, 2013).

1.1 H&M Company History With a storied history H&M have had some significant milestones in their existence, namely;

Erling Persson founded Hennes in Vasteras, Sweden in 1947. Later, Hennes acquired the

hunting and men's clothing chain of stores, Mauritz Widforss, in 1968 and changed its name

to H&M Hennes & Mauritz (H&M).

Expanding out of its home country during the 1960s, the group developed its network in

Norway (1964) and Denmark (1967).

Further international expansion occurred at the start of the 21st century; H&M opened its

first store in North America, Portugal, the Czech Republic, Italy and Poland.

With a view to rejuvenate its brand name, the group signed Madonna in 2007 to create a

fashion line "M by Madonna".

In July 2011, H&M partnered with David Beckham to launch his new bodywear range.

1.2 Brand Portfolio H&M’s brand portfolio has expanded over recent years to now consist of; ‘COS’, ‘Weekday’, ‘Monki’,

‘Cheap Monday’, and ‘&Other Stories’. This multi-brand approach enables H&M to cater for

different consumer groups, fashion trends and price points (Cruz, 2013).

1.3 Resource base H&M’s resource base has provided the organisation with a competitive advantage within the fashion

retail industry. This has resulted in annual revenue increases despite continued investment in their

internationalisation strategy. H&M’s business model is supported by its personnel, particularly their

in-house designers who work with various materials and fashion buyers to create a wide range of

fashion collections (MarketLine, 2012). Collections are then distributed via a central logistics centre

to H&M’s International markets, dependant on the current trends and the subsequent demand from

that country and/or region (ibid). This ensures “continually changing assortment of rock-bottom-

priced goods to help keep shoppers coming back for more” (Cruz, 2013).

To support this business model H&M altered their organisational structure in 2007, moving their

design, buying, and logistics departments into one separate company (MarketLine, 2012).

2 | P a g e

H&M’s designers are supported by “partnering with big-name designers, celebrities, and high-profile

supermodels” (Interbrand, 2013). Recent examples of this include the ‘M-by Madonna’ range, as well

as David Beckham’s bodywear range, and their collaboration with legendary fashion icon Anna Dello

Russo (MarketLine, 2012). This collaboration with famous designers and celebrities is used both in

their products and advertisements as a form of celebrity endorsements which supports the brand’s

product offering by appealing to the “aspirations of its fashion savvy, pop-culture-following target

customers” (Interbrand, 2013). This continued success has resulted H&M’s brand equity being valued

at US$16,751m (Interbrand, 2013). Combining these factors of the organisations resource base helps

provide H&M with a competitive advantage for their future internalisation aims.

1.4 Operations H&M’s retail operation is a centred around a process where fashion collections are designed

centrally before being outsourced to “third party vendors for the supply of its merchandise”

(MarketLine, 2013). This makes H&M vulnerable as it has no assurances of continued supply, pricing

or access to new products, as well as issues such as delays in order fulfilment and lack of quality.

Once the items are produced they are then distributed to H&M’s stores or regional replenishment

centres for distribution (ibid).

H&M looks to support its relationships with its sourcing markets through investing large resources

into sustainability programmes to ensure their operations are “run in a way that is economically,

socially and environmentally sustainable” (H&M, 2013). However H&M’s sustainability objectives do

not alter their growth plans as they still strive for continued growth of territory and inventory

despite their impact on environments around the world (Siegle, 2013).

1.5 Markets Served H&M’s global expansion strategy has provided the organisation with a global foothold on the fashion

retail industry which can be seen with their involvement in multiple markets;

Region Country

Europe Austria, Belgium, Bulgaria, Croatia, Czech Republic, Croatia, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Latvia, Luxembourg, Netherlands, Norway, Poland, Portugal, Romania, Russia, Slovakia, Spain, Sweden, Switzerland, Turkey, United Kingdom

North America

Canada, Mexico, United States

Middle East and North Africa:

Bahrain, Egypt, Israel, Jordan, Kuwait, Lebanon, Morocco, Oman, Qatar, Saudi Arabia, United Arab Emirates

Asia Pacific:

China, Hong Kong SAR, Japan, Malaysia, Singapore, South Korea, Thailand

3 | P a g e

1.6 Markets under development With continued growth aspirations H&M has plans to develop their brand in the developing markets

of Serbia, Lithuania, Estonia, Australia, Indonesia, and Chile (Lishman, 2012).

1.7 Channels to Market H&M’s globalisation strategy is supported by their various channels to market such as; leased store

premises, internet and catalogue sales, and franchise schemes (MarketLine, 2012). H&M only

currently offer online shopping in”eight of its 48 markets around the world” (Fleming, 2013) and as

such is an area of development. H&M recently expressed plans to expand this offering into new

markets including the lucrative U.S. online retail market (Bertfield, 2013).

1.8 SWOT Analysis Strengths Weaknesses

Fast fashion retailing

Sustainability initiatives

Widespread geographic presence

Improved market position in the clothing segment

Excessive dependence on third party vendors for supply of merchandise

Opportunities Threats

Growing preference to shop online

Expanding presence in key growth markets of Asia

Growth in global apparel, accessories and luxury goods market

Weak consumer spending in Europe

Risk of foreign exchange fluctuations

(MarketLine, 2012)

4 | P a g e

2.0 H&M’s Development into non-domestic markets

2.1 The Uppsala Internationalisation Model The Uppsala model (fig 1.0) aims to characterise the different stages of a firm’s internationalisation

process (Johanson and Vahlne, 2009). This process relates to the firms increased market

commitment and its increased geographic diversification as it goes through the internationalisation

process (Hollenson, 2004).

The 1977 model is based on a study of the internationalisation of Swedish manufacturing firms and it

notes how these firms “begin their operations in nearby markets and only gradually penetrate more

far-flung markets (Hollenson, 2004, p.53). Johanson and Vahlne attributes psychic distance – “the

factors which make understanding foreign environments difficult” (2009, p.1412) - as a key rationale

for this incremental approach to internationalisation. This is supported by Hollenson (2004) who

argues that firms are attracted to countries with a minimal psychic distance as they are able to easily

identify opportunities and the perceived market uncertainty is low.

Fig 1.0: The Uppsala Model applied to H&M’s Development into non-domestic markets

(Hollenson, 2004)

H&M leapfrog first two

operation modes by going

straight to foreign sales

subsidiaries

5 | P a g e

Whilst the model implies a rule that firms will incrementally increase their international market

commitment and geographic diversification (Hollenson, 2004), Johanson and Vahlne (1990 cited in

Hollenson, 2004) propose three exceptions to this rule:

Firms with larger resources can take larger internationalisation steps

In stable and homogeneous markets, market knowledge can be gained in ways other than experience

When firms have experience in similar markets, they may be able to generalise this experience to any market

H&M’s expansion into non-domestic markets (Appendix 2) shows patterns that relate to the Uppsala

model. This is evident with their incremental geographic expansion into neighbouring European

countries such as Norway (1964) that continued right up until the end of the 20th century.

However this similarity does not immediately justify the models relevance to H&M’s global

expansion. The aged model is based on neoclassical business environments with often independent

suppliers and customers (Johanson and Vahlne, 2009). This may have suited H&M’s original

incremental expansion (Appendix 2: 1947-1999) but it is not relevant to their current business

model. Today their business model relies on its flexible interdependent network of suppliers and

customers, especially in their crucial manufacturing and distribution outsourcing programmes.

Furthermore, the Uppsala model is based on manufacturing firms and this may not be relevant to the retail industry (Hollenson, 2004). This view is supported by Doherty (2000) who states the “differences between the manufacturing and retailing sectors are significant” (p.225). This implies that the very foundations of the Uppsala model are not relevant to the retail industry and H&M’s expansion into non-domestic markets, questioning the model’s relevance altogether. This is evident with H&M’s business model which leapfrogs the first two operation modes by going straight to foreign sales subsidiaries with their retail outlets (fig 1.0). The modes of operation that H&M leapfrog involve export entry modes. This mode is not relevant to

H&M’s business model as a fashion retailer. Furthermore it does not align with the organisations

growth objectives of increasing their number of stores globally by 10-15 per cent per year. The only

scenario in which export would be relevant would be through H&M’s online retail channel. However

H&M currently only operate this service in a small number of their markets, despite heavy market

commitment through retail outlets in many of their non-domestic markets. This portrays a reversal

of the operation modes in the Uppsala model, with H&M favouring initial market commitment

through foreign sales subsidiaries as opposed to sporadic export/export modes, thus further

reducing the relevance of the Uppsala model to H&M’s development into non-domestic markets.

H&M’s business model dictates that they do not own any store premises, instead it operates

through lease store agreements (MarketLine, 2012). This ensures their expansion into non-domestic

markets can be flexible should market conditions deteriorate. The same is true for H&M’s

production which they outsource to independent suppliers (H&M, 2013). This questions the

relevance of the Uppsala model as although H&M’s non-domestic expansion shows obvious signs of

geographic diversification its market commitment is limited due to the constraints imposed by

H&M’s flexible business model.

6 | P a g e

2.2 EPRG Framework The EPRG framework represents the orientations businesses management teams adopt when

conducting global business activity (Hollenson, 2004). The orientations organisations assume are

heavily based on their management’s beliefs and assumptions concerning global market

opportunities (Keegan and Green, 2010).

Hollenson (p.4, 2004) presents the orientations as follows:

Ethnocentric: home country is superior and the needs of the home country are most

relevant.

Polycentric: each country is unique and therefore each country should be targeted in a

different way

Regiocentric: the world consists of regions, e.g. Europe, Asia, and the Middles East. The firm

tries to standardise its marketing programme within regions, but not across them.

Geocentric: the world is getting smaller and smaller. The firm may offer global product

concepts but with local adaptation

2.2.1 Ethnocentric (1947-1965)

H&M operated with an ethnocentric orientation within Sweden for a number of years to help

develop a strong brand as well as market and operational knowledge. As H&M began its early

incremental expansion, it portrayed ethnocentric characteristics such as limited changes to products

(ibid) due to the similar styles and cultures of the Scandinavian countries in which H&M operated.

2.2.2 Regiocentric (1964-2001)

As H&M progressed through their global expansion strategy it appears they by-passed the

polycentric orientation stage, instead opting for a regiocentric orientation which views global market

opportunities on a region-by-region basis (ibid). This is reflected in their incremental expansion

throughout Europe (1964-1999) and North America (2000-2001). It can be argued that the success of

H&M’s westernised expansion can be attributed to the cultural assimilation between these

countries/regions and the influence this has on consumer trends and purchasing decisions (Guo,

2013).

2.2.3 A Geocentric Transnational (2001+)

H&M’s recent strategy has seen their orientation change as their management beliefs and

assumptions have developed to consider the potential of a global market and the need to develop

integrated global strategies (Keegan and Green, 2010). This is evident with H&M’s 2007

organisational restructure (MarketLine, 2012). This suggests a move towards a transnational

company as H&M look to utilise their global supply chain to serve global markets (Keegan and Green,

2010).

7 | P a g e

2.2.4 A Geocentric Future? (2013+)

As a transnational company H&M will have to continually re-assess their organisational structure as

global competitors emerge (ibid). With a growing online market throughout the developed world

(OECD 2012, cited in Hall, 2012) (Appendix 3), it is likely H&M will need to address their

geographically limited online delivery in the near future if they are to meet the growing needs and

wants of their global markets.

Furthermore as the concept of the global consumer becomes more prevelant, consumer trends may

become more homeogenous (Levitt 1983, cited in Akaka and Alden, 2010 ). This will enable H&M to

contine their business model across countries. However academics argue that globalisation

encourages consumer ethnocentrism as an attempt to preserve local identity and culture (Jackson

2004, cited in Akaka and Alden, 2010). As such offering a promotion adaption strategy (fig 2.0) in

their communication programmes (Keegan and Green, 2010) will facilitate H&M’s geocentric

transnational orientation.

Fig 2.0: The Uppsala Model applied to H&M’s Development into non-domestic markets

Product

Standard Adapt New

Promotion

Standard Straight Extension Product Adaption

Product Invention

Adapt Promotion Adaption

Dual Adaption

8 | P a g e

3.0 Analysis of the Brazilian fashion retail industry

3.1 12C Framework

3.1.1 Country

The leading economy of Latin America and the sixth largest economy in the world (Mintel, 2013),

Brazil offers global market opportunities to a variety of industries as a result of its rapidly expanding

consumer economy. This consumer economy has been supported by an increasing availability of

credit (ibid). The consumer economy contributes to a clothing retail industry with total revenues of

$50.7bn in 2012 (MarketLine, 2013). This dynamic industry is being bolstered by an increasing

“demand supported by strong labour market conditions, moderate credit flows, and relatively

resilient consumer confidence” (Goldman Sachs 2013, cited in Carrico 2013)

With unemployment at 9.89% (PWC, 2007) and increasing wage gains, there are high levels of

consumer confidence which is helping to develop Brazil’s consumer economy (Mintel, 2013). This is

supported by the addition of approximately 30 million consumers who have been lifted from poverty

as a result of Brazil’s economic success despite the 2008 global financial crisis (ibid). This growing

and lucrative industry represents a global market opportunity for H&M to consider market entry.

However a lack of investment in the country’s infrastructure has resulted in logistical bottlenecks for

businesses operating in the country. As a result of these issues many companies compensate for the

logistical burden by increasing costs in their marketing and distribution (Kon 2013, cited in Mintel,

2013). This cost is increased due to the various taxes in place to protect domestic manufacturers

(PWC, 2007). However the government are trying to reduce this burden on retailers with payroll

taxes which they hope will allow retailers to lower their prices (Reuters, 2012).

As well as import taxes, firms also require a membership with Siscomex to allow them to import

goods into Brazil. The contributing factors of poor infrastructure, high taxation, and import licences

affects Brazil’s international competitiveness and “despite the growth of their economy Brazil still

lacks many of the popular US and European brands available in other emerging markets” (Mintel,

2013).

3.1.2 Concentration

The Brazilian fashion retail market is segmented as follows; Womenswear: 47.5%, Menswear: 33.8%,

Childrenswear: 18.7% which correlates with H&M’s product offering.

3.1.3 Culture/Consumer Behaviour

Brazilian consumers are heavily influenced by brands, and distinguish products by the brands

association with price, quality and status (PWC, 2007). Brazilian consumer also associate quality with

price (Beltrame 2013, cited in Mintel, 2013), therefore H&M may need to consider altering their

pricing to ensure their product offering is not seen as poor quality. Brazilian consumer culture

dictates the use of credit for a number of everyday purchasing decisions; as a result many retailers

embed high interest rates into their product pricing which increases the price of many consumer

goods (Mintel, 2013).

9 | P a g e

3.1.4 Channels

Shopping malls and outlets continue to be developed throughout Brazil with each one designed to

suit the relevant profile of both the city it is in and the relevant customers (PWC, 2007). There is an

increasing culture of e-commerce in Brazil with the network of 70 million internet users contributing

to an annual e-commerce revenue of US$6.9 billion in 2006 (PWC, 2007). This is supported by

companies investing in improved distribution and delivery methods to support their online offering

(Euromonitor, 2013). The growing potential of online retail in Brazil is convincing a number of foreign

players to enter the market (ibid) and highlights the potential for H&M.

3.1.5 Caveats

Brazil’s infrastructure is central to the countries future prosperity. Currently the level of

infrastructure does not match its economic aspirations (Mintel, 2013) and this is effecting

organisations that operate within Brazil due to the ‘Brazil cost’. However with Brazil hosting the next

2016 Summer Olympics as well as the 2014 football World Cup, the government is likely to radically

improve the country’s infrastructure, particularly in the tournaments host cities (ibid). This should

reduce logistical issues for organisations, reducing the effect of the ‘Brazil cost’ which currently limits

Brazil’s international competitiveness, therefore making the consumer market more appealing to

the international brands which it currently lacks.

In attempt to combat the high costs of operating in Brazil, Zara have moved 40% of the production

on-shore, enabling them to lower their prices and remain competitive in the Brazilian consumer

market (ibid). This highlights a possible entry strategy for H&M.

3.2 The Macro-environment Political Stable political conditions with the left-centre Workers’ Party (Partido dos

Trabalhadores) leading a coalition government for the last 10 years (Leahy, 2012).

High import tariffs and taxes to protect domestically manufactured goods (Mintel, 2013)

Companies importing into Brazil require registration to Siscomex

Programme for accelerated growth (Programa de Aceleração do Crescimento) (PAC); US$65.5 billion investment into improving Brazil’s infrastructure

History of corruption of political officials such as the Mensalão Scandal (Leahy, 2012).

Economic Fifth largest economy In the world with a GDP of US$796billion (PWC, 2007)

Population of 181 million and an unemployment rate of 9.8% (ibid)

FDI is increasing reaching US$18.3billion in 2004 (ibid). Brazil’s FDI projects grew by 38% in 2011 (Financial times, 2012)

Import Tax, Federal VAT, Cofins, and Pis contribute to Brazil’s economy Social Heavily influenced by brands and use brands to distinguish products in relation to

the brands association with price, quality and status (PWC, 2007)

Brazilian consumer culture dictates the use of credit for a number of everyday purchasing decisions; as a result many retailers embed high interest rates into their product pricing which increases the price of many consumer goods (Mintel, 2013).

Technological There is an increasing culture of e-commerce in Brazil with the network of 70 million internet users contributing to an annual e-retail revenue of US$6.9 billion in 2006 (PWC, 2007)

10 | P a g e

3.3 Porter’s Five Forces – The Micro-environment The Five Forces Analysis tool (fig 2.0) helps to classify the main factors within a particular industry

(Brennan et al, 2008).

Fig 3.0 Forces driving competition in the apparel retail industry in Brazil, 2012

(Marketline, 2013)

Degree of rivalry

Moderate With a fragmented industry, composed of many independent apparel retailers, there is a moderate rivalry (MarketLine, 2013). However the growing prosperity of this industry with Brazil is attracting larger apparel retail organisations (Mintel, 2013) that have the financial capacity to open outlets throughout the country, which will intensify the degree of rivalry in this industry.

Buyer Power Moderate Due to the individual nature of apparel retail buyers, yet the array of choice and low switching costs buyer power is classified as moderate (MarketLine, 2013). Buyer power is also weakened due to the brands ability to differentiate through style and price range (ibid)

Threat of New Entrants

Strong The Brazilian retail industry is appealing to new entrants due to its growth, value, low barriers to entry and low buyer switching costs, and low level of product differentiation (ibid). However this threat may be weakened due to the poor infrastructure and the high levels of Tax in the country which will increase the costs for many new entrants (Mintel, 2013).

Threat of Substitutes

Weak The overall threat of substitutes is deemed as weak as there are no real substitutes to apparel retailers. There are alternative routes such as buying direct from Manufacturers and shopping online through sites such as eBay, however these routes pose little threat to the apparel retailers (MarketLine, 2013).

Supplier Power Moderate Brazilian fashion suppliers (Manufacturing and Wholesalers) power is weakened as they face competition with low wage countries such as China and India (ibid). The only real source of strength suppliers have is the risk involved with changing suppliers as they may not be able to match the required output of the fashion retailer (ibid).

11 | P a g e

3.3 Assessment of the Brazilian apparel retail market The rapidly growing Brazilian consumer market offers a lucrative (US$50.7bn) apparel retail industry

(Marketline, 2013). Supported by strong consumer confidence, an abundance of credit, and low

levels of unemployment (9.8%) (PWC, 2007), Brazil presents a real non-domestic opportunity for

H&M.

The crux of Brazil’s apparel retail industry is with the country’s poor infrastructure. Brazil has

prospered from its growing economy, yet the country’s logistical infrastructure has not kept up with

the pace of change. This operational burden is intensified with the addition of the essential Siscomex

import license needed to enable non-domestic firms to import into Brazil (Novais, 2011). This has led

to logistical bottlenecks, which along with a high taxation programme has led to retailers having to

increase their prices well beyond relative international prices (fig 3.0). This has led to the Brazilian

retail market being vacant of many popular US and European brands (Mintel, 2013).

Fig 4.0 Relative product prices

Product Brazil Cost United States of America Cost

Jeans BRL1,000 (US$495) US$100 iPhone 4S BRL2,000 (US$995). US$549

(Mintel, 2013)

These increased operational costs will undoubtedly affect H&M’s pricing strategy if they were to

enter Brazil, potentially forcing them to move their products into a premium market. This risk is

evident with Topshop’s entry into Brazil where their stores are located next to Prada and Dolce &

Gabbana (Mintel, 2013). However following a similar approach to Topshop would mean H&M going

against their core concept of giving the “customer unbeatable value, by offering fashion and quality

at the best price” (H&M, 2013).

Fortunately for H&M, Brazil’s government is working to improve the country’s infrastructure ahead

of the 2014 World Cup and 2016 Olympics. This development is supported by a series of

programmes for accelerated growth (PAC) which has seen the government invest US$65.5 billion

into the country’s infrastructure. This along with retail specific tax breaks will hopefully reduce the

‘Brazil cost’, allowing H&M to enter Brazil with a similar pricing strategy to their other international

markets. However pricing is critical in Brazil as consumers view price as an indicator of and therefore

H&M need to ensure the quality of their products is communicated to their target market within

Brazil.

Brazil’s growing consumer economy offers more growth prospects that the weak consumer spending

in Europe which is identified as a risk to H&M (section 1.8). Brazil’s retail market offers the

opportunity for H&M to work towards their global expansion goals. With the growing e-commerce

market in Brazil, H&M can also expand their online product offering as well. Entering Brazil will align

H&M with their geocentric orientation by serving global markets with their global supply chain. With

competitors currently operating in Brazil, H&M face a risk losing market share in this lucrative

economy. The ‘Brazil cost’ should soon be reduced due to Brazil’s PACs, enabling H&M’s business

model to operate in a similar way to its other markets, thus making market entry into Brazil a

suitable business opportunity.

12 | P a g e

4.0 Relevant Market Entry Modes

4.1 Export Mode – E-Commerce Hollenson (2004) argues that export modes are usually used in the initial stages of international

market entry. However as a retailer exporting is not relevant to H&M, unless they were to consider

an e-commerce direct export strategy. This approach would provide H&M with more control over

the marketing mix (ibid), thus ensuring consistency with their brand. This entry mode is justified by

the continued growth of online retail (MarketLine, 2012) and the 70million Brazilian internet users

that contribute to the country’s US$6.9 billion e-commerce market (PWC, 2007).

However this contradicts H&M’s growth strategy of increasing the number of their retail outlets by

around 10-15% per year (H&M, 2013).With no brand presence in the Brazilian market it is

questionable whether there will be sufficient demand for H&M’s online channel to support this

entry mode.

4.2 Intermediate Mode - Franchise Franchise market entry would involve H&M building a relationship with a Brazilian franchisee to

enable H&M to set up their operations (Hollenson, 2004). Through this agreement H&M would

provide the franchisee with a standard package of business components such as;

Trademarks/names, copyright, designs, patents, business know-how (ibid). In return the franchisee

provides H&M with capital, market knowledge, and market feedback (Cateora and Ghauri, 2000).

This entry strategy would enable H&M to expand their development over larger areas of Brazil, with

minimum investment due to the addition of the vested interest of the franchisee (Chee and Harris,

1998). However a major risk with franchise schemes is the lack of control (Kotabe and Helsen, 2001)

which could affect H&M’s international reputation should the franchisee underperform (Hollenson,

2004).

Franchise schemes offer a low-risk/cost entry mode (ibid). However modes of entry with low

resource commitment, and therefore low risk, are unlikely to “foster the development of

international operations” (ibid, p.283). Root’s (1994 cited in Hollenson, 2004) suggests that

organisations follow a pattern of rules when deciding market entry strategies. H&M’s entry patterns

link to the strategy rule, ensuring any choice is thoroughly analysed and evaluated (ibid). The impact

of this shows that a Franchise scheme is not out of the question, however H&M has stated openly

that Franchise schemes are not part of their overall growth strategy (H&M, 2013), this suggests

H&M also follow a Pragmatic rule in that if their preferred entry mode is not available, alternatives

are investigated (Hollenson, 2004).

13 | P a g e

4.3 Appropriate Entry Mode - Hierarchical Mode – Greenfield Investment –

supported by e-commerce. Internal factors such as H&M’s size and international experience gears their organisation towards an

entry mode with more resource commitment than that required by the Franchise mode.

The recommended entry mode for H&M to enter the Brazilian retail market is to adopt a hierarchical

mode of Greenfield investment. This approach would see H&M establish their operations through

retail outlets (Kotabe and Helsen, 2001). This would require a large investment of time and capital by

H&M (Hollenson, 2004). However H&M would have full control over their non-domestic marketing

as well as 100% of any profits (Kotabe and Helsen, 2001).This approach would enable H&M to

integrate their business concept across Brazil, allowing them to prepare for future international

expansion across Latin America (Hollenson, 2004).

H&M’s size indicates it is prepared to commit to this entry model. The firm’s international

experience (Appendix 2) helps to reduce the costs and uncertainty of operating within the Brazilian

market, increasing the likelihood of H&M adopting this resource intensive strategy (ibid).

Brazil’s relatively stable government and growing consumer economy justifies H&M’s commitment

of resources as a result of this strategy. Whilst the country may have infrastructure issues, they are

being improved by the government’s PAC initiatives which look to reduce the logistical burden on

H&M and the subsequent ‘Brazil cost’ (Mintel, 2013). Whilst the lack of infrastructure may have

been a negative aspect of Brazil’s market attractiveness in the past, it has meant that the Brazilian

apparel retail market is lacking popular European and US brands (Mintel, 2013). This equates to a

low level of rivalry in market which justifies an increase in resource commitment (Hollenson, 2004).

A key aspect of H&M’s strategy is that they operate through leased store premises (H&M, 2013).

Therefore although they will be using a Greenfield Investment strategy, H&M can still remain

flexible, should market conditions deteriorate.

Opting for Hierarchical entry before the Franchise option is appropriate as the franchise mode could

cause tension when transitioning to a wholly owned subsidiary. Therefore this approach solves this

issue whilst keeping the option of a franchise programme available, should H&M want to use this

entry mode to increase their geographical expansion across Brazil.

With the growing popularity and value of Brazil’s e-commerce industry, this report recommends that

H&M support their entry into Brazil with an online channel. This will cater for the increasing culture

of e-commerce in Brazil (PWC, 2007) and help to spread H&M’s brand across the country.

Adopting this approach will allow for H&M’s entry into a growing Brazilian economy whilst also

providing the foundations for future international expansion throughout Latin America, potentially

through a regional distribution centre. These foundations can also help H&M to enter their other

brands into the Brazilian market, helping H&M to work towards their international retail growth

objectives.

14 | P a g e

5.0 Final summary H&M aims to increase its international expansion by increasing its number of stores annually by

around 10-15% (H&M, 2013). Despite successful launches in Europe, North America, and the Middle-

East, H&M has yet to establish themselves in South America.

Brazil came through the financial crisis relatively unscathed (Mintel, 2013), and as such has

experienced a growing economy over recent years which has contributed to a lucrative (and

growing) consumer retail economy valued at 50.7bn in 2012 (MarketLine, 2013). With

unemployment at 9.89% (PWC, 2007) and increasing wage gains, there are high levels of consumer

confidence which is being spurred by an abundance of credit in the country (ibid); it is clear why

H&M view Brazil as a potential market opportunity.

However a combination of protectionist tax laws and poor infrastructure has led to logistical

bottlenecks in the country, forcing retailers to recover their distribution costs in increased product

pricing (Mintel, 2013). This has led to Brazil’s retail market having increasingly high prices in

comparison to H&M’s other non-domestic markets (ibid). This factor, along with the Brazilian’s

judging quality on price poses the question whether H&M’s affordable fast-fashion brand will hold

the same position in the Brazilian market as it does in other markets.

Brazil’s rise as a major figure in the international market is mirrored by the country hosting both the

2014 Football World Cup and the 2016 Olympics. These events, accompanied by the governments

‘Programa de Aceleração do Crescimento’ (Programmes for accelerated growth – PAC) aim to solve

Brazil’s infrastructural problems, reducing H&M’s logistical burden should they enter Brazil

In terms of market entry exporting is not relative to H&M’s retail business therefore that is not

appropriate. Franchise agreements allow for low commitment and low risk, yet allow H&M to spread

its brand across Brazil with the help of the Franchisee. However without real resource commitment

it is unlikely that H&M’s international growth objectives will come to fruition.

Taking Root’s typology into account, it appears the most appropriate market entry strategy for H&M

is Hierarchical Entry via Greenfield investment. This approach provides H&M with full control and

allows H&M to integrate its successful business concept across Brazil, providing a route for further

international expansion across Latin America (Hollenson, 2004).

i | P a g e

Bibliography Akaka, M. Alden, D. (2010). Global brand positioning and perceptions: International advertising and

global consumer culture. International Journal of Advertising. 29 (1), 37-56.

Bertfield, S. (2013). H&M's Online Troubles: U.S. Shoppers Are Still Waiting. Available: http://www.businessweek.com/articles/2013-03-28/h-and-ms-online-troubles-u-dot-s-dot-shoppers-are-still-waiting. Last accessed 29th April 2013.

Brennan, R. Baines, P. Garneau, P. Vos, L. (2008). Contemporary Strategic Marketing. 2nd ed. New York: Palgrave Macmillan.

Carrico, T. (2013). Brazil retail sales add to macro gloom. Available: http://blogs.ft.com/beyond-brics/2013/02/19/brazil-retail-sales-add-to-macro-gloom/#axzz2S8ccgCqm. Last accessed 1st May 2013.

Cateora, P. Ghauri, P (2000). International Marketing: European Edition. Berkshire: McGraw-Hill

Publishing Company.

Chee, H. Harris, R (1998). Global Marketing Strategies. London: Financial Times Management.

Chu, J. Schomer, S. Uchida, M. (2012). Bridging the GAP. Available:

http://web.ebscohost.com/ehost/pdfviewer/pdfviewer?vid=9&sid=fb2997e0-7ef3-4e10-b9d0-

8fc90b3e84ed%40sessionmgr104&hid=103. Last accessed 29th April 2013.

Cruz, J. (2013). H&M, a Master of Cheap Fashion, Moves Upscale. Available:

http://www.businessweek.com/articles/2013-04-25/h-and-m-a-master-of-cheap-fashion-moves-

upscale. Last accessed 30th April 2013.

Dishman, L. (2012). H&M's Expansion in Latin America Begins in Mexico. Available: http://www.forbes.com/sites/lydiadishman/2012/04/23/hms-expansion-in-latin-america-begins-in-mexico/. Last accessed 29th April 2013.

Doherty, A. (2000). Factors Influencing International Retailers' Market Entry Mode Strategy:

Qualitative Evidence from the UK Fashion Sector. Journal of Marketing Management. 16 (1-3), 223-

245.

Euromonitor. (2013). Retailing in Brazil. Available: http://www.euromonitor.com/retailing-in-brazil/report. Last accessed 1st May 2013.

Financial times. (2012). The fDi report 2012. Available:

http://ftbsitessvr01.ft.com/forms/fDi/report2012/files/The_fDi_Report_2012.pdf. Last accessed 1st

May 2013.

Fleming, O. (2013). Why IS H&M taking so long to launch online shopping in the U.S.? After promising e-commerce a year ago, retailer now says site will go live 'sometime this summer'. Available: http://www.dailymail.co.uk/femail/article-2301272/Why-IS-H-M-taking-long-launch-online-shop-US.html. Last accessed 1st May 2013.

ii | P a g e

Guo, X. (2013). Living in a Global World: Influence of Consumer Global Orientation on Attitudes

Toward Global Brands from Developed Versus Emerging Countries. Journal of International

Marketing. 21 (1), 1-22.

H&M. (2013). H&M Annual Report 2012. Available: http://about.hm.com/content/dam/hm/about/documents/en/Annual%20Report/Annual-Report-2012_en.pdf. Last accessed 29th April 2013.

Hall, J. (2012). Britons are biggest online shoppers in developed world. Available:

http://www.telegraph.co.uk/news/uknews/9054400/Britons-are-biggest-online-shoppers-in-

developed-world.html. Last accessed 1st May 2013.

Hollenson, S. (2004). Global Marketing: a decision-orientated approach. 3rd ed. Essex: Pearson

Education Limited.

Interbrand. (2013). Best Global Brands of 2012. Available: http://www.interbrand.com/en/best-global-brands/2012/HM. Last accessed 30th April 2013.

Johanson, J. Vahlne, J. (2009). The Uppsala internationalization process model. Journal of

International Business Studies. 40 , 1411–1431.

Keegan, W. Green, M. (2010). Global Marketing. 6th ed. London: Pearson Prentice Hall.

Kotabe, M. Helsen, K (2001). Global Marketing Management. United States of America: John Wiley

& Sons, Inc.. 1.

Leahy, J. (2012). FT Interview: Dilma Rousseff. Available: http://www.ft.com/cms/s/2/c76e6180-0c70-11e2-a776-00144feabdc0.html#axzz2S9AtHNZa. Last accessed 1st May 2013.

MarketLine, 2013. (2012). Global Online Retail. Available:

http://advantage.marketline.com/Product?pid=MLIP0567-0005. Last accessed 1st May 2013.

MarketLine. (2012). H & M Hennes & Mauritz AB. Available:

http://advantage.marketline.com/Product?pid=F7E41ECA-902F-483F-B72C-

A7FAEA92122E&view=Overview. Last accessed 29th April 2013.

MarketLine. (2013). Brazil Apparel Retail. Available: http://advantage.marketline.com/Product?pid=MLIP0907-0004&view=d0e21. Last accessed 1st May 2013

Mintel. (2013). The Rise of the BRICs. Available: http://academic.mintel.com/display/643768/. Last accessed 1st May 2013.

Novais, A . (2011). Getting a Siscomex License. Available: http://thebrazilbusiness.com/article/getting-a-siscomex-license. Last accessed 1st May 2013.

PWC. (2007). 2006/2007 From São Paulo to Shanghai: New consumer dynamics: the impact on modern retailing. Available: http://www.pwc.com/en_GX/gx/retail-consumer/pdf/brazil.pdf. Last accessed 1st May 2013.

iii | P a g e

Reuters. (2012). Brazil to cut payroll taxes on retail sector, finmin says. Available: http://www.reuters.com/article/2012/12/19/brazil-economy-mantega-idUSE5E8KB00Y20121219. Last accessed 1st May 2013.

Siegle, L. (2013). H&M: how does the fashion retailer's sustainability report stack up?. Available:

http://www.guardian.co.uk/sustainable-business/h-and-m-sustainability-report. Last accessed 29th

April 2013.

iv | P a g e

Appendix 1: Key Company Information “Fashion and quality a t the best price” (H&M, 2013)

1.1 H&M Global Expansion

1.2 H&M Group Income Statement

v | P a g e

Appendix 2: H&M’s expansion into non-domestic markets

Incremental expansion

vi | P a g e

Appendix 3: Growth of Online Retail in the Developed World