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Gaspard Alice 6765820
SUGGESTION OF ENTRY IN A NEW MARKET : SRI LANKA
Zara is often considered a separated entity from its holding group Inditex, but we should not forget that Zara-Inditex is the first company that started the growing process to become one of the biggest retailer of the world. Now inditex own eight fashion firms: Pull and Bear, Oysho, Stradivarius, Massimo Dutti, Zara Home and Uterque occupying 88 countries with more than 7.000 stores. Zara expansion from 1975 to nowadays is fast-growing and well-known all around the world thanks to the introduction of the “fast-fashion” industry concept. This new way of considering fashion, the vertical management process, and the financial power of the holding group Inditex can be considered the three big promoters of Zara. The fastest growth of the company was realized in China, where in only 7 years Zara opened 179 shops. However as business consultant of the company I consider that the presence of Zara is still relatively small in the Asiatic-pacific market where there the stores are only 517 stores, compared to the 1362 stores in Europe. My suggestion is to stretch in the market of Sri Lanka. I will concentrate my report on a PESTEL analysis focusing mainly on the political, economical, and social factors, which are the most relevant considering that Zara expansion does not include its production, but only an opening store. During the analysis I have decided to compare Sri Lanka to Indonesia and Philippines structures to show Sri Lanka market opportunity, which explains also why I will proceed with the same entry mode: a franchisee.
The reason why I decided to enter in a new market is because the growing rate year shops this year will be contained between 6% to 8%, against the 8% to 10% grow rate of the previous years. This reduction and the raise of the stock market allow us to have more cost disposition and risk margin to enter in a new market.1(Bloomberg,
A further advantage is that Sri Lankans’ main apparel manufacture has been producing ZARA clothes since 2014; although all ZARA clothes must anyway be sent to the central centers to follow the regular logistics process ZARA, the company can still benefit from the good relationship with the Sri Lankan Export Development Board and its popularity. (2014)
1 Inditex stock reached 30.55 euros in the Euro Stoxx 50 Index on Wednesday 9th^ of March at 12.40 p.m.
SRI LANKA
PESTEL analysis of Sri Lanka
ECONOMIC FACTOR
Sri Lanka is one of the latest emerging countries of South Asia. Sri Lanka Consumer Price Index CPI is slowly increasing, waving around 183.80 Index point in February to 184.90 Index Points in January. Anyway, considering that only 30 years ago it was 10.80, the country is rapidly increasing.^1 The GDP Growth Rate grew 2.5 % in the fourth quarter of 2015 and has an average of 6.22% growth from 2003 until 2015. Comparing Sri Lanka with Philippines, which is the most similar country where Zara is present, I do not find the decreasing of the CPI and the GDP a problem as Philippines Consumer Price is now lower with 142.90 Index Points and GDP growth rate is 2.0%; 0.5% lower than Sri Lanka. Moreover, Sri Lanka’s 2016 GDP forecasting is approximately growing to 3.90% in September and 4.99% in December.2 As a consequence of the lower GDP Growth Rate of Philippines, Sri Lanka GDP Per Capita of 2135.66 $ is higher than the Philippines 1649.45 $(GDP per capita referred to 2014), which is a relevant consideration see that we have already experienced a country with a lower GDP per capita. The only negative data found compared to the Philippines, and the financial situation overall, is the inflation rate, which instead is higher: 2.7% against a 0.90%. In any case I do not cogitate about Sri Lanka Market as we had success in countries with a much more elevated interest rate such as Indonesia (4.42) and South Africa (6.20).
The graphic illustrates Sri Lanka economic growth rate similarity to Indonesia and Philippines in the 2012 when Sri Lanka had not started growing yet. If at that time Sri Lanka market was in line with the other countries, now that it starts growing it can not be a propicious investment.
Beyond the economic growth factor, which demonstrates Sri Lanka potentials to implement Zara industry, other economical factors need to be considered for a complete comparison.
2 I precise that like every estimation is done by analysts and could not reflect the exactly future movement of the market.
low to incentive foreign companies to invest in Sri Lanka. In fact, Sri Lanka has been ranked 90 out of 186 in the World Economic Freedom ranking of 2014, which measures the pro-business policy environment of a country. Sri Lanka rank position is one more time in the middle between Philippines and Indonesia.
Philippe Le Houérou(2014), vice president of World Bank of South Asia affirms the status of a resilient economy, which, despites all the difficulties, has a huge potential. He also explained that in his first visit in 2014 he had actually seen tangible progress noting the opportunity to exploit its strategic position between the West and the East, but in particular between the two growing economy of Singapore and India. Beside the favorable location Sri Lanka is also taking advantages of its natural aphrodisiac landscapes investing more and more in tourism, which means foreign people who have money to spend. Tourism has undoubtedly a positive reflection on the retail industry. According to an estimate of the local strategic consulting company Jones Lang La Salle done in 2012 tourism in Colombo this year will contribute around 20% of the city’s total retail spending.
The centres of the retail market, and in particular of the fashion market are the capital Colombo, Gampaha, Kandy, Kalutara, Galle, Matara and Jaffna. Despite the capital, where the major part of the population is condensed, I will suggest the opening of a store in Kandy, the second largest city and one of the main touristic and urbanized area. Further interesting locations are Galle, described by the government as one of the two pilots of Sri Lanka, placed side by side with Kandy, and Gampaha, which has the highest per capita income after the capital. The rank I chose is due to the same order given in the cities strategic development project approved by the ministry of megapolis and western development (2014), which points out that the project will ameliorate the congestion problem of the city and the aesthetics and spaces of the urban area having a positive spotlight on retail business and tourism. However at the moment these are only future plans and we should not forget that Sri Lanka economic
growth has just started, therefore I will suggest a first implementation only in the capital where the market is safer thanks to the urbanization and highest income of the country. Moreover, it is here that we can find the biggest malls, shopping centres and “fashionistas”.
SOCIAL FACTOR
The estimated population (july2015) numbers is 22,053,488, with a 41.9% of people between the 25-54 years old where people from 30 to 40 occupy the major part. The population structure is a further reason that took me to compare Indonesia, Sri Lanka and Philippines. Indonesia counts 255,993,674, by which 42.31 % of 25- years old, while Philippines is slightly lower with less than half of the population.
3 2014 Index of Economic Freedom Indonesia 100 Philippines 89 4 On average, tourists spent 10 days8 in Sri Lanka during 2012. Assuming tourists spent an average oftwo days in Colombo and given a tourist spends aroundUSD 100 per day9, around 55% is assumed to have been spent on food and shopping. Thus, tourism is estimated to have contributed a significant LKR 1.2 billion, which is 10.2% of Colombo’s total retail spending in 2012. Given the government’s tourism targets, weestimate that by 2016, tourism will contribute around 20% of the city’s total retail spending, gaining the spotlight in terms of retail potential.
The number of citizens living in poverty has diminished from 23% in 2003 to 9 % in 2009 and, as seen from its economic growth, it is still diminishing. Not only do Sri Lankans have and will have more and more income to spend, but it is a population of spenders; differently from the others Asiatic emerging countries, where people is more used to save money, Sri Lankans are more inclined to spend. This is also why Sri Lanka has one of the lowest Gross Domestic Savings (%GDP), 20.055, which confirms again a middle position between Philippines 17.2 and Indonesia 33.9. Education, health and life expectancy are between the highest in South Asia and the world countries with a similar per capita. (Houérou,2014) The increment of education, technology and tourism will cause a crescent demand for high branded products and interest on the West world with the will to imitate its trends. This process has already begun after the civil war and the growth of India. However what made Sri Lankans fashion conscious is the garment manufacturing industry working for international brand such as H&M, Victoria’s Secret Tommy Hilfiger, Abercrombie & Fitch, Marks 7& Spencer, Levi’s, Gap, Nike.
TECHNOLOGICAL FACTOR
I will limit the technological analysis saying that as a consequence of the economic growth, internet access is increasing with its consequent globalization impact.
FINAL STRATEGY
Beside Sri Lanka political situation is now solved and the government is promoting economic freedom, the country still presents a high-risk level because of its inflation, up and down taxation and inflation rate. Moreover, even if our main competitors H&M, Mango and United Colors of Benetton have already experienced the consumer taste of the Sri Lankans, I still suggest the more detached approach of a franchisee with a first opening in Colombo because of the culture distance and small market.
5 World Bank data, estimation done in 2013
