INTRODUCTION:
Harrods is one of the best luxury departmental store in the United Kingdom. The store was founded by Charles Henry Harrod in 1849. The store is an attraction for many investors and had many owners. However, in May 2010, the store was bought by Qatar Holdings for £1.5 billion. (This is Money, 2018)
Harrods includes all the top designer brands of the world. The store has a wide range of the luxury items for men and women and children including shoes, accessories, fine jewellery and watches. Beauty products, food and wine and homewares can also be found in Harrods.
A quintessentially British brand: Harrods has always been an attraction for tourists. In year 2017, Harrods was able to achieve £2 Billion in revenue and £233.2 million as their net income (Jahshan, 2018). The brand is growing year by year; however, it lacks international presence.
SWOT ANALYSIS:
STRENGTHS:
1. British heritage brand
2. Globally renowned.
3. Biggest luxury departmental store
4. Attraction for tourists
5. Large variety for men, women and children
6. Online store
7. Retailer of top designer brands
8. Excellent customer service
9. Top employer for year 2018
WEAKNESSES:
1. Tourists are the major customers, very few regular customers.
2. Big store, big overhead expenses.
OPPORTUNITIES:
1. Should introduce and focus on their own brands, for large profits.
2. Should open stores in brand conscious economies.
3. More items for online store.
4. International presence.
THREATS:
5. Brexit
6. Majority of customers are from Gen X.
COMPARISON
India China
Cost of Living $452.11 $587.50
Crime Level 90th 80th
GDP Per Capita $1982.7 $8643.1
Unemployment Rate 3.5% 4.7%
Literacy Rate 62.75 96.4%
Inflation Rate 4.1% 1.8%
Institutions 47/140 65/140
Infrastructure 63 29
ICT Adoption 117 26
Macroeconomic stability 49 39
Health 108 44
Skills 96 63
Product Market 110 55
Trade tariff 133 124
Labour Market 75 69
Financial System 35 30
The above comparison clearly tells that China is better option in terms of Human Capital, GDP, Enabling environment etcetera.
PESTLE ANALYSIS
Analysis of Macroenvironment of China is vital to understand the economy better. Over the years China has improved and enhanced so much to become the world’s prominent country.
POLITICAL:
China is among the most powerful countries. One of the five permanent members of the Security Council of the United Nations and the fourth largest in terms of area. Beijing is the capital of China.
The Communist Party of China is the establishing and governing political party of the People’s Republic of China. Although, China appreciates a stable political condition, the absence of political opportunity is also observed. Numerous experts have raised questions on the absence of transparency of China’s politics.
In any case, it is significant that with a stable political condition in China is flourishing. China positions itself as an exceptional country for Foreign Direct Investments (FDI).
In the same manner, China is a predominant investor abroad too. Chinese Foreign Direct Investments has achieved numerous nations throughout the years. The United States, the UK, Australia, Pakistan, Bangladesh, Indonesia, the United Arab Emirates, Venezuela, Argentina and Chad are some of the nations where Chinese venture has for sure been shocking.
ECONOMICAL:
As referenced above, China is the second biggest economy in terms of nominal GDP. Nonetheless, it is the world’s biggest economy on a buying power. A ton of financial changes began in the late 1970s which helped China make fast economic development. The nation has made a move from a halfway to a market-based economy and the GDP development has averaged about 10 percent a year (The World Bank, 2018).
In any case, it is significant that financial improvement has additionally caused a few difficulties for China. High disparity, quick urbanization, and natural harms are some of the difficulties that the nation needs to manage to keep up its fast pace of growing economy. One reason why numerous multinational firms produce their items in China is the accessibility of cheaper workforce which is an extraordinary beneficial competitive advantage for China; in any case, a few experts contend that the quick economic development has likewise prompted an increment in wages in the nation. China’s normal wage level tripled somewhere in the range of 2005 and 2016 and now it is higher than in Argentina, Brazil, and Mexico.
The standard corporate income tax rate is 25%; nonetheless, the Chinese government lessens the rate to 15% for qualified organizations which are the businesses empowered by the government. The individual pay charge rates run from 3% to 45% (PwC, 2018).
SOCIAL:
China is the most populous nation with an aggregate populace of roughly 1.4 billion (BBC, 2018). This is an enormous market for customer items. As referenced above, normal wage level has gone up throughout the years bringing about an increase in customer spending. It is additionally worth referencing that numerous individuals in China, like the natives of other developing economies, long for status symbols, for example, luxury vehicles, most recent advanced cellphones and designer dresses to exhibit their prosperity.
The literacy rate in China is 96.4%. Like the noteworthy advancement in the literacy rate, the nation has like reduced poverty. As indicated by a report distributed by China’s State Council Leading Group Office of Poverty Alleviation and Development, the nation has lifted more than 68 million individuals out of poverty over the most recent five years. It ought to be referenced that China means to wipe out supreme neediness by 2020 (Brand, 2017). Be that as it may, there are some social difficulties confronting China today. For instance, maturing citizens is a major threat as it will create an age gap.
TECHNOLOGICAL:
As of March 2018, China has the world’s biggest online presence with 772 million clients (BBC, 2018). There are some huge tech companies in China. Truth be told, these organizations and some others are powerful to the point that numerous huge organizations from different nations have failed in China.
China has set a dream to be a worldwide leader in science and technology. To accomplish this, the nation propelled ‘mass business entrepreneurship and innovation’ program in 2015. This program intends to spread enterprise all through China. It additionally intends to assist the nation with moving from a labor-oriented economy to a tech oriented one.
LEGAL:
Legal environment is the last element to discuss in the PESTEL analysis of China. There are several laws that regulate business and employment practices in China. For example, labour standards, employee remuneration and benefits, labour disputes, and other relevant issues are regulated by The PRC Labour Law 1995, the PRC Labour Contract Law 2007, and various administrative regulations (Chen, 2018). The Catalogue of Industries for Guiding Foreign Investment regulates FDI in the country. The Catalogue divides FDI into four categories i.e. encouraged, restricted, prohibited, and permitted.
Encouraged category includes 384 industries. Agricultural machinery manufacture, and fruit and vegetable drink production are some of the industries in this category. Restricted category includes 35 industries. Construction and operation of power grids, banks, and securities companies are some of the industries in this category. Prohibited category includes 28 industries. Air traffic control, postal companies, and domestic express delivery of letters are some of the industries in this category. Permitted category includes industries that do not fall into any of the aforementioned categories (Chen, 2018).
ENVIRONMENTAL:
China’s fast economic advancement has affected on its indigenous habitat extremely. Water and air contamination, mechanical waste, deforestation, environmental change, and biodiversity misfortune are a portion of the instances of ecological difficulties confronting China today. Notwithstanding, it ought to be referenced that the Chinese government has taken various activities to address the natural concerns.
INDUSTRY ANALYSIS
The retail business is a standout amongst the most prominent fields of business in China. The boost the Chinese GDP is probably going to proceed for a considerable time to come. The merchandise trade in China added 36% to the general GDP in 2015. As many Chinese families have seen an increasing trend in their salaries, the expenditures of the Chinese populace have also increased drastically, and the Chinese market has developed into one of the biggest and as yet developing consumer markets around the world. Multinational firms and local retailers both compete unequivocally for the consideration of the Chinese consumer. Retail trade revenue for consumer products in China has increased by 10% from 2016 to 2017. Monthly retail incomes in the clothing and footwear of China have added around $120 billion in year 2017. The Chinese retail industry is exceptionally competitive and diversified.
PORTER’S 5 FORCES:
THREATS OF NEW ENTRANTS:
Previously Chinese markets were very secured by the Government and no foreign investor could enter China. State funded retailers were the major players despite poor performance and were fully supported by the government by strong barriers to entry. However, recent changes in the regulations has encouraged competitive retailers to expand and foreign retailers to enter China. Previously the retailing industry was controlled by the local retailers which is not the case now. This is mainly due to the lowered entry barriers and increasing retail sales which resulted in fierce competition and larger retailers. Since there is a lot of opportunity for investment in the retailing industry of China but entry barriers like economies of scale and larger capital is increasing rapidly.
THREATS OF SUBSTITUTE:
In China street markets were very popular among the people despite being very unhygienic and crowded, but people preferred buying from those tiny shops due to cheaper prices of fresher items. Local grocers also give a competition to large retailers in day to day used items, however, the local grocery stores are priced higher. In recent times Chinese have become more conscious about health and their social status in the society, which has cut down the shares of these local grocers and street markets. Now a days, with an obdurate busy life style, online stores and television shopping have become more popular giving a tough competition to the bigger retail stores. To overcome this issue, many renowned stores are emphasizing on online presence as well.
BARGAINING POWER OF SUPPLIERS:
With the incredible advancement potential of retailing industry, the retailing stores have turned into the most imperative distribution channels. Producers are the most essential providers for retailers. The sharp rivalry frequently makes the fittest to survive. Whereupon, the manufacturing companies have lower control over retailers. In addition, with the further and quick improvement of retail industry, numerous retailers are getting to be bigger in terms of their operations and subsequently their buying scales. Those retailers are responsible for a major portion of sales of the producers. Continuous high-volume orders are essential for the prosperity of suppliers. Moreover, this will lead the suppliers to a situation with low bargaining power.
BARGAINING POWER OF BUYERS:
Most retailers offer fixed price on the goods, but customers have leverage as they can choose retail stores to buy from. Rise in GDP has resulted in increased disposable income which has encouraged people to opt for a better life style. Better life style has increased the consumption of many different products. Retailers are expanding their store size and the number of outlets to overcome the shortage of products and are focusing on customer orientation. The best provider of these factors will win the most customers and eventually be the best in the industry.
MODE OF ENTRY:
One of the most popular modes of entry into the China is Foreign Direct investment commonly called as FDI. FDI is a method of entering an international market with a keen interest in expansion and long term lasting impression in the market abroad. FDI is categorized into two forms: greenfield investment and brownfield investment.
GREENFIELD INVESTMENT:
“A green field investment is a type of foreign direct investment (FDI) where a parent company builds its operations in a foreign country from the ground up.”
(Investopedia, 2018).
Harrods is a luxury grocery store, the best option for Harrods to open their store in China would be FDI as greenfield investment. Harrods has never compromised on their brand name and thus no other mode of entering an international market can uphold their brand name. PESTLE analysis has supported the fact that majority of Chinese have gotten status conscious which is backed up by the economic boom in the country. China also enjoys second place among the top 10 best destinations for FDI by receiving $136 billion in 2017 (UNCTAD, 2018) and more than 2500 new investments are approved on daily basis, which supports the idea of greenfield investment for Harrods as a mode of entry into China.
ANSOFF MATRIX
Ansoff Matrix is a simple tool to analyze the attempt of a brand to grow in terms of product portfolio or by entering new markets. According to Ansoff Matrix, Harrods is adopting Market Development Strategy since the luxury department store will tap into new market as FDI with its existing product portfolio. It is one of the riskiest growth strategy, but the risk is minimized since the Chinese market is already very status conscious and known to buy from reputable luxury brands.
CHALLENGES TO ENTRY / SURVIVAL
- Adoption to Chinese culture and traditions: Understanding the culture is vital to start any business abroad. Asian culture is very different than that of Western. Language can also be one of the biggest barriers. Translation of all the legal documents, policies and procedures is necessary.
- Psychic distance.
- Corporate indebtedness can increase financial illiquidity.
- Fluctuation in exchange rates of RMB.
- Corruption: Governmental favoritism to local retailers.
- Developing International Property Rights: “First to file” rule is applicable when applying for a patent or copyright. If a local competitor register for a patent first will get it regardless of being the inventor.
- High capital to start.
CONCLUSION
Harrods is a British heritage and a luxury departmental store. Continuous increasing trend in the GDP has reflected on Chinese lifestyle. People have become more conscious of their status and social class and like to show off with high end luxury brands. In this situation, entering China as a WFOE (Wholly Foreign Operated Enterprise) with Greenfield Investment is the best option for expansion. The retail industry in China is growing year on year with great margins providing a great opportunity for retailers.
17.12.2018