Primark’s Entry into the Brazilian Apparel Market

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Executive Summary

Since the establishment of Primark in 1969, the company has grown from a local outfit to a global entity. Over the past four decades, the company has expanded its operations from Ireland to over ten nations across Europe.

As a result, Primark has emerged as one of the most reputable retailers in the European apparel industry. Investing in offshore markets is proposed as one of the ways to further the growth and success of the entity. Italy and Brazil were the two suggested markets where the company wanted to invest.

Following a thorough market analysis, Brazil was selected as the desired new market for Primark. The reason why Brazil was considered as the country of choice is that it is experiencing a rapid growth in its apparel industry.

The cost of establishing presence in the country is considerably low. Licensing is the preferred market entry strategy. The approach is less risky and requires little capital and engagement compared to other approaches.

Brief Synopsis of the Issue

Primark should enter into the Brazilian market to remain competitive and to increase its revenues.

Recommendations

Primark is one of the most successful retailers in the European apparel industry. As a result, it can succeed in the Brazilian market
Licensing is the preferred market entry strategy since it involves minimal risks and involvement.
Brazil is the market of choice since it has a rapidly growing apparel industry.
Following the licensing process, it is important to monitor the activities of the licensee to safeguard the company’s interests.

Background

Primark is a British clothing retailer based in Ireland (Jones, Temperley & Lima 2009). Since its inception in 1969, the company has continued to expand its market by opening stores across Ireland and other parts of the world, such as Germany, Netherlands, the United Kingdom, France, Portugal, Austria, Hungary, Spain, and Belgium (Jones et al. 2009).

The organisation made the decision to expand after the realisation that firms have to move from local to global by entering into new markets. Entry into new frontiers is often referred to as globalisation. However, the strategy is characterised by a number of challenges.

Competition is one of the major issues impeding expansion to new markets by a business. As a result, a firm wishing to expand its operations to a foreign country must carry out a market study to determine the opportunities available. The research also highlights the factors that promote business and the entry strategy to be used.

Primark’s entry into the Brazilian market will be an important undertaking for the company. While there are great opportunities in the country, the apparel industry is also associated with stiff competition (Pinto & Souza 2013).

The country has a large population of over 190 million people that provides a wide market for the goods. Over the past few years, the country’s apparel industry has continually grown and is currently valued at $50 billion.

Analysis of Market Opportunities in Brazil

The Porter’s Five Forces driving competition framework is used to analyse the country. Some of the forces involve buyer and supplier power. Others are threat of new entrants, risk of substitute products, and degree of rivalry (Porter 1990). Brazil controls over 11.5 percent of the total retail industry value in America. The apparel industry is one of the best performing sectors in this market.

The excellent performance owes to the fact that the industry is experiencing a high growth rate. As a result, competition is low. The situation decreases rivalry among key market players.

Reduced rivalry encourages other companies to invest in the market since the industry is viewed as having more room to accommodate additional players. The country’s large population also encourages the entry of new players into Brazil’s apparel industry (MarketLine 2013).

Today, the Brazilian fashion industry is controlled by a number of local and multinational companies (Utton 2006). As such, it is characterised by a large number of fashion retail stores. However, it is important to note that Brazilians do not have a lot of disposable income.

As such, a new entrant may opt to target the low end market. The presence of many retailers in the market is an indication that threats to entrants is significantly low compared to other countries. Reduced product differentiation is also of great importance in promoting the entry of new firms into the Brazilian market.

Low product differentiation encourages companies to invest in the industry (Utton 2006). The lack of substitutes for apparel products makes it easy for a business to compete favourably with other firms in the sector.

New players face few hurdles when investing in the Brazilian apparel industry. For instance, the capital requirement to establish a business in this sector is low compared to other industries, such as construction. There also exists a large number of wholesalers and manufacturers of fashion products.

Brazil’s Attractiveness

As stated earlier, the Brazilian apparel industry has been experiencing a sharp growth over the past few years. Currently, the growth rate is estimated to be at 6.5 percent annually (Nakanishi 2007). The development reveals that the current market players are strong and reap benefits from their participation in the sector.

As a result, any new business wishing to invest in the Brazilian apparel industry must be prepared to face stiff competition and rivalry from existing companies. It is also important to observe that the industry is currently experiencing a rise in online sale of products. Such businesses have reduced the market for retail stores, such as Primark. As such, new entrants are likely to invest in a market that is shrinking.

An increase in the demand for custom made goods is reducing the opportunities for retailers in Brazil. Most of these operators stock ready-made products.

Companies venturing into the Brazilian fashion industry are likely to enjoy some benefits. Switching costs in the sector are generally low. The factor reduces the cost incurred by new firms intending to invest in the market. Product differentiation is also generally low. The situation allows new entrants to compete favourably with the existing firms.

As such, companies venturing into the country stand to benefit from the opportunities available. The low differentiation in products owes to the fact that most retailers in the apparel industry obtain goods from global manufacturers and wholesalers (MarketLine 2012). New businesses are also required to observe few legal requirements.

The most significant cost to be incurred by new entrants into the Brazilian apparel industry involves the acquisition of stock. Most of the retail stores operating in the country depend on wholesalers for the supply of products. Some retailers opt to obtain their merchandise direct from the manufacturers.

As a result of the fragmented nature of the supply chain in the industry, suppliers have reduced power over the market (Babu 2012). Market liberalisation in the country also cushions the retail stores against exploitation by the suppliers.

As already indicated in this paper, barriers to entry are limited. The reduction in barriers lowers the cost of doing business in Brazil. The capital requirements for a new retail store in the apparel industry are also considerably low (Belussi & Sammarra 2010).

Company Situation Analysis

The SWOT analysis framework is used for the purposes of reviewing Primark’s situation with regards to its intentions to enter into the Brazilian market. The analysis explores the strengths, weaknesses, opportunities, and threats associated with Primark (Porter 2004). It is important to examine the company in order to determine the factors that may affect its establishment in the new market.

The analysis will highlight the improvements that need to be made to enhance Primark’s competitiveness. The external factors that may impede the success of the company are also identified (Bravo 2008).

Primark’s strengths are likely to promote its success in the Brazilian market. The company has a strong brand name and a good reputation. As a result, the company stands a chance to succeed in the new market in spite of competition from a number of both local and multinational establishments (Porter 2004).

The company is also well established, especially in the European market. It is expected that the business will record similar success in Brazil based on the fact that the country is experiencing sharp growth in the apparel industry, which is encouraging to new entrants. In addition, the company has a strong supply chain management system that is technologically advanced.

Just like any other business, Primark has a number of weaknesses (Porter 2004). To begin with, the firm has been reported to earn low profits in some of the regions where it has previously launched its operations in the world. Such areas include France. Activities, such as online sale of products, have in the past eaten into the market previously controlled by retail stores in Brazil.

The profitability of retailers in the country’s apparel industry is therefore expected to lower in the coming years. Customer power at Primark is high owing to the fact that most Brazilians purchase goods as individuals. For instance, the shift in the preference of some of the customers in the country from ready-made goods to custom made products has reduced the market previously controlled by retail stores.

Primark can exploit a number of opportunities in the Brazilian market. To begin with, there are few barriers to entry (Bravo 2008). Businesses wishing to invest in the industry are not required to fulfil many legal requirements. Liberalisation of trade in the country has been achieved by removing barriers that would hinder investment from foreign firms.

Technological advancement in Brazil also presents Primark with an opportunity to successfully enter into the new market (MarketLine 2013). Through technology, the company can be in a position to make improvements on their supply chains. The Brazilian apparel market is also experiencing a rapid growth. As a result, it is expected that there is a considerably large number of Insatiable consumers customers.

The Brazilian market also poses a number of threats to Primark and other similar firms. To begin with, environmental, global, and social regulations are on the rise (MarketLine 2013). Companies are now expected to exhibit corporate social responsibility. Compliance to such regulations increases the cost of doing business in the country.

The global economic slowdown also exposes firms in the apparel industry to the risk of earning reduced profits. A decrease in the disposable income held by customers is also a threat to the entry of Primark into the Brazilian market. The development is likely to reduce the sales volume of company resulting to low profitability (Cattaneo 2010). The preference of the customers is also changing from ready to custom-made products.

Readiness to go Overseas

Primark is one of the leading retail stores dealing with the sales of clothes, shoes, accessories, and beauty products in Europe. Having started in Ireland in 1969, the company has over the past four decades widened its operations across Europe opening stores in over ten countries.

The company has been successful in entering these European markets and has emerged as one of the most reputable brands in the apparel industry. To be able to remain competitive in the global market, Primark needs to extend its operations globally. As a result, they need to carry out market studies on potential countries in order to be able to come up with the most appropriate choice.

Primark’s entry into the Brazilian apparel market is likely to be eventful. The country offers Primark a unique investment opportunity in that it is experiencing rapid growth in the apparel industry. Rivalry in the market is also considerably low, which offers an environment that is conducive for a young business to thrive (Petrou 2009).

Reduced product differentiation is also likely to be beneficial to Primark since competitors will have no added advantage therefore offering a level ground for all players in the industry. There are also limited barriers into entry. With the country being a liberal economy, the Brazilian government attempts as much as possible to encourage foreign investment.

Although Brazil is associated with great opportunities for businesses in the apparel industry, a number of factors would deter Primark from entering the market.

For example, there are several similar local and multinational stores in the country (Jones et al. 2009). As a result, the company will take a long time to out-do such well established businesses. Online sales also threaten the entry of Primark in the Brazilian apparel industry.

Despite all these challenges facing Primark’s proposed entry into the Brazilian market, the opportunities that the investment presents outweigh the challenges. The company has also been successfully built its reputation in the global market by providing quality goods to their customers (Jones et al. 2009).

For over three decades now, the company has successfully entered the major markets in Europe. As a result, the management is capable of overseeing the entry into the Brazilian market effectively.

Global Sourcing and Production

Global sourcing is the term used to describe the process of obtaining goods and services from foreign markets across political and geographical borders (Manuj 2013). The reason behind the practice is to promote efficiency in the delivery of goods and services. Many companies today use the practice to obtain low cost products from foreign countries.

The motive behind this is to cut on the cost incurred when obtaining goods and services. Global production on the other hand refers to producing on a global scale. Such manufactures enjoy a wide range of economies of scale and are in a position to rationalise costs.

The two concepts are important for persons wishing to understand international trade. Retail stores across the world source their products from global suppliers and manufactures (Jin 2005).

Similarly, Primark has to carefully consider the preferred source for their products. Usually, the company buys its goods from manufactures and suppliers across the globe. The proposal for the firm to move into overseas markets will require that they look for the most efficient means of obtaining goods.

It is obvious that Primark cannot continue relying on its previous sources of their products owing to the fact that they will be required to incur huge transportation costs. However, it is important to ensure that the source of the products selected does not affect the quality of the goods and services offered (Jin 2005).

Market Entry Strategy

The term market entry strategy refers to a carefully pre-planned means of delivering goods and services to a newly targeted market and their distribution. The process of developing an effective market entry strategy requires a firm to carry out a thorough search on potential customers and competitors (Ross & Harradine 2010). One must also put into consideration possible trade barriers.

The firm wishing to invest overseas must therefore have a clearly defined plan on the source of the goods. Proximity of the source of goods to the market is one of the key factors to consider. The cost of obtaining and having the goods delivered to the business should also be considered.

Primark must be keen to ensure that the costs incurred in obtaining the goods and delivering them to the market does not exceed the expected gains following the sales of the products. There are a number of market entry strategies that can be used by Primark.

The strategies include licensing, turnkey project exporting, joint venture, outsourcing, Greenfield project, Export Processing Zones (EPZs), franchising, alliances, as well as the use of wholly owned ventures (Collins, Kamel & Miller 2006).

Licensing is the recommended entry strategy for Primark. It requires little involvement and expenses. The strategy is almost similar to franchising. Primark will need to sign an agreement with another firm allowing them to operate under their brand name.

However, Primark will be required to closely monitor the firm that they have licensed in order to ensure that the terms of the agreement are being adhered to, as well as to offer technical support to the new business. The strategy is associated with a number of advantages and disadvantages.

Merits associated with the strategy include low risk to the parent firm. The licensee contributes capital and sells goods under the licensor’s brand name (Collins et al. 2006). Both parties are also involved in marketing. As a result, the sales volumes go up.

Primark may encounter a number of challenges following its move to license another firm to carry out its foreign operations. It will only enjoy limited participation from the agreement. The company may lose control over its brand. Potential returns to Primark from marketing activities are lost to the licensee. There is also fear that the licensee may develop know-how and become a competitor.

Implementation of the Market Entry Strategy

Before licensing, it is important that Primark thoroughly investigates the licensee. Having determined the trustworthiness of the licensee, Primark will enter into an agreement with the other firm allowing them to use their brand name for Brazilian operations.

Primark will however be required to carefully monitor the activities of licensee in order to secure their own interests (Kilduff & Chi 2006). Once the licensor is fully established, employees from Primark will be sent to offer assistance to the licensee.

References

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Belussi, F & Sammarra, A 2010, Business networks in clusters and industrial districts: the governance of the global value chain, Routledge, London.

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Cattaneo, O 2010, Global value chains in a post-crisis world: a development perspective, World Bank, Washington, D.C.

Collins, M, Kamel, M & Miller, K 2006, ‘Beyond the core in retail’, Strategy and Leadership, vol. 34, no. 4, pp. 14-18.

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Jones, B, Temperley, J & Lima, A 2009, ‘Corporate reputation in the era of Web 2.0: the case of Primark’, Journal of Marketing Management, vol. 25, no. 10, pp. 927-939.

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Utton, M 2006, International competition policy maintaining open markets in the global economy, Edward Elgar, Cheltenham.

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