Essay: Analysis of Primark entering India

1.INTRODUCTION

Companies who have gained domestic market success are increasingly planning to Internationalize. The global corporate trend of internationalization has taken the world economy into a state of Globalization, in which diverse economies of the world are interlinked through international trans-border commerce.

Cracking into emerging markets requires a cathartic approach for connecting with a new consumer base. It requires selling the brand’s story in the most convincing way so that it engages & charms the customers and makes them want to be a part of the brand.

In this essay, we take you on a journey of a UK based Multinational Enterprise (MNE) willing to enter an emerging market to expand its business. This essay will throw a light on the various decisions a company has to take while entering an alien market mainly focusing on various modes of entry into that host market.

The Company in this case study is Retail arm of UK based Associated British Foods plc – “Primark” who is planning to enter an emerging market (India). The following segments will provide a gist about the company/brand Primark followed by reasons of entering India & finally touching the most important aspect of modes of entry into India citing alongside their advantages/disadvantages.

2.WHAT IS PRIMARK : An Overview

Primark Stores Ltd. is an enormous retail group Headquartered in Dublin, Ireland (known by the name of “Penneys”) which specializes in fast fashion. It is a Retail Segment of Associated British Foods plc, a diversified International Group (Head. London) & Operates as it’s subsidiary.

Primark offers a wide collection of products in Clothing for Babies, Children, Men & Women. It also houses a collection of Beauty Products, Accessories, Homeware, & Sweets. It aims at providing latest fashion at affordable prices.

3.HISTORY/BACKGROUND OF THE COMPANY –

From Where it all Began

Primark was founded in June 1969 by Arthur Ryan in the interest of Weston Family(Controlling shareholders in Associated British Foods plc), who have been in the retail business for many years. It marked it’s entry into the fast fashion world by opening it’s first store in Dublin, Ireland by the name of “Penneys”. Penneys became a household name in Ireland. After getting well established there, it started to expand in other territories. It’s first store outside Ireland was opened in Derby, UK in 1973. The name Penneys was similar to the company named “J.C. Penney Company Inc.” (stylized as JC Penny – an American departmental store chain) which was already registered by James Cash Penny(Owner) in that region. This forced a change in name – giving birth to “Primark”. All the stores that opened thereafter were under this name.

Global Domination

Primark prides itself by offering customers chic fashion at reasonable prices as compared to competitors (‘amazing fashion, amazing prices’ being It’s tagline). Thus, making it very popular and a leader in market. Relying heavily on customer base, Primark has grown rapidly through word of mouth encouraging it to expand its operation (The Guardian 2005). The company opened many stores across Europe between 2006 to 2013 particularly in Spain, Portugal, Germany, Belgium, Austria, and France. Its sales rose by 150% between 2009 & 2014. (Business Insider 2018).

Its first store in US was opened in 2015 at Boston, Massachusetts. It continued to expand in the US becoming the fastest growing retailer there. Primark now has 360 stores with its activities spanning over 11 Countries & employs 75000 people and is continuously expanding.

4.EXPANSION IN EMERGING MARKETS – INDIA

A)Why India?

1.Figures Matter

Foreign Retailers are now eyeing India for further Expansion. The Indian Retail market is the epicentre for International brands. The Net Worth of apparel retail market was estimated around US$ 85 Billion in FY 2017 & is projected to increase by 9.7% on a yearly basis & is projected to reach 115 Billion in 2026. To add on top of this, share of consumer spending on Clothing & Footwear out of total consumer spending is at 6.7% higher than both US (3%) & UK (5.7%). As per Global Retail Development Index report by AT Kearny – Indian retailers are leaving China behind, India is now the most vibrant market with flourishing economy & consumption boom.

2.Shifting Consumer Attitude

Also, India has a huge population & there is a rise in disposable income among fast-growing-middle class, who have a willingness to spend rather than save. Thus, satisfying the Market Seeking Strategic Goal ( expand in terms of meaning) .

3.Liberalization of FDI Norms

India is an inspiring retail space & is continuously alluring many international players. The FDI norms have been liberalized in respect to Single Brand Retail. Mandatory local resourcing requirement of 30% has also been relaxed. (Stevens, 2012)

B)Timing of entering the market(When)

Some companies prefer entering the market first in order to take the First-Mover Advantages. However, many firms gradually increase their operations or follow their competitors to new emerging markets to take Late-Mover Advantages.

Propensity to Internationalize: Primark a late-mover

Firms which have Huge domestic market base from large economies have the leverage to internationalize late. Primark is one such company, which is well established in Ireland & UK, so it can afford to take late-mover advantage.

First Movers in India – Apparel Retail

Many International brands have made it’s mark in India & are enjoying tremendous success. Global brands like H&M, Zara, Mango, Guess, UCB, GAP, Forever21 & Brands such as Adidas, Nike, Levi’s etc. have already made deep penetration in Indian markets and are benefitting from consumers preference for them for their excellent quality, fit & styling. Adidas AG has become the first foreign sports brand.

Among the latest entrants, H&M has already attained Turnover of US$ 75 Million with just 12 stores in first year of its operation. On the hand, Zara has reached around US$ 140 million.

The time is now

In this exhilarating environment it has been predicted by the retail experts that more than 50 international brands will enter in the coming 3 years, also existing foreign brands are making plans to expand their stores in India. It is the most opportune time for Primark to enter India in & to prosper in one of the fastest developing economies.

Late-Mover Advantage

Whether a first-mover or a late-mover both have their own advantages & even after tons of research no conclusive evidence of a clear-cut preferable strategy comes out. In this case Primark will enjoy late-mover advantage.

1. Lack of uncertainty: is very helpful as huge R&D & experts have pointed towards growth in apparel retail in India.
2. Tax reforms – GST: Introduction of GST is considered favourable by Indian as well as Global Retailers who are considering to expand in India. (expand)
3. Experience of First-Movers: Majority of foreign retailers are planning to expand in India including H&M, Zara etc. by opening more stores, Their confidence to thrive will in turn help Primark to open directly with large number of stores (large Scale) instead of being cautious and opening on a low scale.

5. Potential Market Entry Strategies

How to Enter the Indian Market

Perhaps the most Important question after selection of Where & When is How to enter a particular market. Exporting, Licensing/Franchising, Joint Venture & sole venture are most commonly used modes among numerous others. In the following segments we will enumerate three different ways by which Primark can enter India and cite its advantages & disadvantages alongside.

I. Joint Venture

Definition

“A JV may be defined as any arrangement whereby two or more parties co-operate in order to run a business or to achieve a commercial objective.” (Joint Venture Forms and Precedents, Butterworths, October 1997.)

Why JV in India

There are many sectors in which 100% FDI is not allowed, in these sectors Joint Ventures are seen as the most popular mode with lowest risk to enter Indian market.

Joint Ventures in India are trending in almost every sector and are a preferred form of corporate structure, a growing number of foreign companies are interested in it. There are several successful Joint Ventures between Foreign & Indian Companies with Inditex(Zara) – Trent Ltd. (TATA) , Walmart – Bharti Enterprises, Mahindra – Renault , Volvo – Eicher to name a few.

Forms of JV in India

There are 2 types of JV in India namely Equity & Contractual

1. Equity Joint Venture

It is an agreement to establish a separate legal entity which is jointly owned by both parties. The parties collaborate to provide money & resources towards the assets as contribution of the legal entity formed. The share of the foreign party is taken through payment in cash. There are three principal forms of Joint Ventures in terms of shareholding – Minority (less than 50%), Majority (More than 50%) and a 50/50 JV.

2.Contractual Joint Venture

There is agreement to work together without creation of a separate legal entity. This form is usually taken up for a limited term on a project basis.

Business Structures of JV

Structures that are used to construct a JV are classified under Incorporated & unincorporated JV’s equally. Although the most popular option is through the incorporated route , other options are also available.

• Incorporated: Company or Limited Liability Partnership(LLP)
• Unincorporated: Partnership or Strategic alliance

How will Primark be introduced in India

The strategy that we feel the best for Primark is a Majority Joint Venture. Selecting a good host partner is a vital step for a profitable joint venture. We feel that a Group like TATA will be best suited for the JV. An Equity JV(Majority) through Incorporated Business Structure in the form of a Company JV will be our way forward.

Advantages of JV in India

TATA is a trusted group in Indian market and has been involved in many extremely triumphant Joint Ventures in many sectors. Retail Brand Zara was launched with TATA and many brands such as Starbucks, Vistara etc. are also enjoying continuous success by its association with TATA Group.

TATA is a huge group and association with it provides the following benefits :-

• Access to established distribution & marketing channels.
• Access to financial resources of TATA Group
• Ease of setting up operations in India can be achieved through well connected contacts of the Indian partner.
• Profit repatriation to home country is free of charge after all the domestic & federal tax liabilities
• Costs & risks will be shared with the Indian partner, reducing the burden that otherwise would have been borne by Primark alone.
• Liability of foreignness i.e. discrimination against foreign companies are reduced by JV due to the presence & trust the Indian Market has on TATA.

Disadvantages of JV

Cultural Differences

Management style & cultures of UK & India are different, this may lead to poor co-ordination & integration between the Joint Venture parties. People having different ideology, preferences & tastes need to managed , if not they can become a hindrance in growth. This basically means International cultural differences can complicate the Joint Ventures. (Child & Markoczy, 1993)

Communication Barrier

A JV involves different companies from different countries who have their own Interests & Goals, there is absence of clear communication between partners in a Joint Venture which in the long run is not healthy.

Limited Control & Equity

Full control & ownership is not retained in JV. Thus, making it very difficult to manoeuvre the company according to the desire of the home country (UK) all the time. Thus, there are operational inflexibilities that exist.

II. Licensing/Franchising

Definition

In a Franchise agreement (distribution agreement), a global retailer partners with local company. It sells the intellectual property rights to that local company which is responsible for marketing, promoting & launching the Brand in the host market (Indian), the brand owner (global retailer) receives royalty fees from this local company.

Overview

The Indian government had allowed 100% foreign direct investment (FDI) in single brand retail and out of the 28 brands that have entered India since then, 23 have been through franchise or distribution partnership( Data from Third Eyesight – Retail consulting firm).

Gap Inc, Aeropostale Inc, Desigual, Rider and Ipanema have entered India through franchise agreements.

Advantages of franchising

• Cultural Distance & Resource Distribution: Companies are cautious while doing business in countries which are culturally far i.e. have long cultural distance. Such companies are unwilling to commit huge resources at the beginning for such companies. Franchising is most appropriate.
• Swift Expansion at Low Cost: Franchising provides high scalability which is vital for capturing market quickly to establish it’s presence for future domination. All this is provided under this form of market entry at minimal cost as the franchisee provides the capital & franchisor provides the brand.
• Territorial Trading Knowledge: India is a huge country having diverse cultures, languages & markets. Most global retailers neither have enough knowledge or experience to invest across different states & cities. This gap is bridged by the franchisees as they have adequate knowledge of local market conditions.
• R&D Expenditure Savings: Research & Development expenditures are very high when a company decides to enter a new market. This expenditure is saved as the franchisor has experience of business procedures, consumer’s choices, needs etc. in the host market (India).
• Advertisement/Brand Promotion: Franchise business are better promoted than the traditional business as franchisee puts in lot of effort to promote the brand, although as per franchisor guidelines but they know how to attract the target audience. The total cost of branding is also lower in Franchisee model as it is shared.

Disadvantages of franchising

• Negative performance: Bad performance by other franchisees may have a negative effect on franchise’s reputation.
• Hardship in persuading franchisees: During the period of franchising agreement the profits may observe several ups & downs. When the business is down, the franchisee may lose his enthusiasm in the franchise. In situation like these the franchisor finds it difficult to motivate the franchisees in terms of various guidelines related to pricing, delivery, promotion of brand etc.

III.WHOLLY OWNED SUBSIDIARY(WOS) – GREENFIELD INVESTMENT

Definition

The term “Greenfield” signifies investing in an empty plot of land to construct new facilities for own use (Cavusgil/Knight/Riesenberger 2014, p. 428). A WOS is a company in which 100% shares are held by another company known as the Parent Company (Holding Company). For e.g. – ABC co. of UK owns all the shares in XYZ Pvt. Ltd. of India.

Overview

In Greenfield Investments new facilities are established in the Host Country (India).It involves starting business in the new market from “Ground Zero” (Griffin/Pustay 2013, p. 363). In this type of WOS there are no minority shareholders as all the shares are held by the Parent company; it conducts its activities under the guidelines of the Parent company. It has its own management structure. Having a WOS in a country like India helps the parent company in maintaining its operations in such divergent geographical areas & markets with control.

Advantages of WOS

Regulatory Relaxations

Previously, in single brand retailing foreign companies could only own 49% & for the remaining 51% they had to get permission from Department of industrial policy & promotion (DIPP). However, in early 2018 these restrictions were eased, allowing such companies to fully own their Indian operations without any permission from DIPP.

Taxation Privileges

Taxation of foreign companies under the Indian Income Tax Act, 1961 is @ 40%, However, Income of Domestic companies is Taxed @ 30%. WOS is treated as Domestic companies under Indian Tax Laws & is eligible for various deductions & exemptions which is very beneficial.

Financial Advantages

Simpler reporting can be done by the parent company of WOS into a single Financial Statement through Consolidation. Also with use of Information Technology (IT) Financial Information systems of the parent & subsidiary company can be integrated for smooth running of the business. Shared Financial Statements, marketing programmes & administrative services helps in reducing cost & resources.

Constant Support from Parent Company

Parent companies help to setup their WOS by providing them support in the form of employees & staff. Executives are also sent by them in order to ensure dependable person in charge of the operations. Thus, the subsidiary receives ready made group of people having experience in the business.

Disadvantages of WOS

Expensive mode to enter a market

One of the major setbacks of WOS is that setting up of the business in a foreign country is very expensive. Large amount of money is required for R&D and feasibility studies not only to get the operations running, but also to know the cost to carry on for coming 5 years based on economic factors.

Cultural Obstacles

A WOS is an extension of a foreign company who does not have enough experience of operating in the host market (India). There various cultural barriers like local language difficulties, cultural differences, unavailability of skilled employees in the area etc. which may negatively affect the business.

Slow to Establish

Greenfield ventures involve high level of risk & uncertainty related to future revenue & profit prospects & take quite a time be established.

6. CONCLUSION

Even the most thought out market entry strategy is not an assurance for success. Companies must be willing to accept the risks involved in any entry mode they select. Companies approach new international markets with precaution, so analyzing the market opportunities along with their internal capabilities is a must to actuate the approach that will be a best match.

Entering a new market is never easy; this is because Brands are developed in home country where there are different cultural, demographic, regulatory & economic factors which are known to the managers/owners as they have grown up competing in those markets. However, as compared to this moving into a foreign market is a very intimidating task.

No matter which mode of entry is selected, all have their own advantages & disadvantages. However, a clear strategy with a well disciplined approach is required. It all depends upon a company how they want to introduce themselves in the new market for e.g. Companies not willing to take risks can take up franchising at the beginning & then slowly move towards other avenues OR Companies who want to make its mark from the very beginning but wants to play safe can enter into a Joint Venture with a reputable local company so as to target customer preferences from the very start through such JV company who knows the Host Market in & out OR Companies who are confident enough that they will be able to survive in the host market (India) alone can set up their on WOS in the market so that they make all the decisions themselves & also earn all the profits without sharing with anybody.

Concluding the topic , we suggest that no matter what strategy you select to enter the market it should be properly planned & discussed and should be followed with faith even though it may result in early disappointment some times because its success will be a financial boom for the company establishing it among the Global Leaders.

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