You are required to write a report which will be addressed and discussed at the company’s next Board meeting. The report should be written in a business style, of no more than 4,000 words outlining the different aspects of the investment proposal. These aspects together with allocated marking are provided below as guidance;
Market entry considerations (10%)
Political and economic risk
Country’s appetite for Foreign Direct Investment(FDI), FDI trends
Competitors analysis
Financial consideration (30%)
Investment appraisal
Impact on financial reporting of the projected results
Corporate & capital structuring
Cash/ profit repatriation
Tax opportunities/costs
Specifics risks associated with overseas investments (30%)
A detailed consideration and evaluation of specific foreign exchange exposure the investment may be faced together with a detailed hedging and management of this potential risk
Day to day and management of these risks
Long term and strategic management of identified ongoing risks
Market Entry Alternatives (15%)
Advice and appropriate recommendation on the market entry
Commercial and legal consideration of selected option
Operational matters (15%)
The report should highlight key operational issues in managing a large investment in an overseas market. It should make recommendations’ as to how these will be effectively managed.These should include the following:
Recruitment and management of personnel from a distance,
Management and respect of cultural difference
Effective communication with personal based in distant countries.
Next Plc, as a second largest retailer in clothes for UK, plans to move forward with the expansion of its stores. Although around the world the trend shows a slowdown of retail stores and the market is getting captured by the online sale. In a very short span of time the online market has captured a huge part of the industry and has led to close down of various big and small stores and outlets. However, the tough online market and the consumer climate have not let the hopes down for the company to open up new stores. The company has identified around 1.4 Mn square feet of new space for its future expansion. In the scenario where the stores and markets are getting closed down, this would show up a growth of around 20 percent. This can act as a strong turning point for the store market and better serve those customers no satisfied with the online market and can also attract the ones on the other side of the table as well.
The new store expansion also helps the company with its online business as around 38% of the orders are being collected from outlets; it is easier to find locations which are attractive in a weak retail scenario. Thus the idea of this store does not only provides a platform for retail physical market but also provides an equal platform for our online market as it can act as a common location or pick point for the same. In an internet and online based environment it acts as a counter instinct to open up stores where the others around are getting closed. However, this initiative to open up store is yet to get planning approval. In previous scenario when there were huge markets for retail stores it was comparatively tough to get the approval but we are finding it easier to get consent from the municipalities in the current scenario.
Today, Next has around 500 stores in UK and more than 200 stores in 40 plus countries. In last few years various large fashion and other retail stores have opened up across UK. In 2011, August Next opened its home and garden store which is a combined fashion store. In 2014, other two large home and fashion stores were opened. Next has launched its mail order operation in 1988 with a book containing 350 pages which creates an outline for catalogue retailing. The online shopping was then introduced in 1999 which made the entire book available to shop from. Next now serves customers from around the world, it consists of customers from 70 countries outside United Kingdom approximately. Next has over the number of years expanded its reach across the globe.
We have continued to improve our customer service and have initiated various services for customer like next day delivery straight to customers home. The tough market and industry standards in current scenario makes it very difficult to attract customers, however through an improved customer service experience we can attract the customers and get their loyalties in long run. Customers will have a facility to collect or return any items at any store nationwide, this is in turn create a lot more opportunity for the customers to feel connected and have easy reach for their queries and concerns. Moreover a new facility of in house delivery is being set up where we have the ability to service the clients even on weekends. This will make the customers feel important and their time getting valued in turn from customer satisfaction point of view this service will help us attract them. The customers can also avail the facility of checking their accounts immediately after a purchase or after a return and can make their payments online. This will help them to get connected to us and reach us with just a click and make their experience easy and user friendly.
International Investment / Expansion Decision:
Next Plc has decided to expand its business operations to France by opening its retail stores in Paris which is a global center for fashion. This expansion can help us grow manifold in terms of demand and as a brand because Paris as discussed is a global center for fashion and successfully leaving our footprints in Paris will help us grow as a brand altogether. However, this expansion decision will have to deal with many factors. Following are the factors we have to consider before investing in France:
Political, Economic and Social Risk:
Political – France also comes under European Union which has a stable political environment for doing business and trade. This can prove to be in our huge advantage as currently the online market has taken over lot of stores and physical retail market. There is a huge competition in market and therefore we can take advantage of this stability for our expansion decision. We can also take a chance to invest a big amount in this expansion.
Economic –Economic climate in France is currently stable but there is a problem as the Sterling is weak against Euro. Due to this weakness of Sterling there are chances of foreign exchange loss in some transactions. But if we are successful with our launch and the France market turns out to be a boon for us, this exchange loss will be negated by the increased revenue from Paris.
Social – Population of France is high and on an increasing trend, therefore it can prove it to be a good customer base for us. As our target group of 25 to 45 in UK is falling therefore high population in France will provide us an opportunity to increase our target group.
Foreign Direct Investment (FDI) in France:
For global expansion we will need a huge amount of money to invest in development of new product to be launched in Paris, investment in infrastructure, purchase of necessary machines for local production, buying property, hiring new staff, etc. This proposed expansion is very expensive and will require huge foreign direct investment (FDI) in France, therefore we have to comply with the foreign direct investment policy of France. We have to set competitive prices for our products and have to provide different offers to attract new customers and to improve our brand loyalty in Paris. This will require lot of pre work require so that we figure out the legal and rightful ways of investment and also figure out how and when to strike the market so that we do not make any mistakes considering the amount of money involved.
As per the results of the World Investment Report by the UNCTAD, foreign direct investment in France has fallen and it has shifted France from 11th to 19th place in the list of world’s most FDI attractive countries. This can prove to a negative sign in midst of our venture and should raise concerns. But currently the situation has considerably changed and is different because FDI inflow has doubled from US dollar and ranges from 15bn to 44bn. Paris is ranked number 2nd in the world to host MNCs head office after Tokyo. Currently over 500 MNCs have their head offices in Paris. It also has a good ranking in the report of 2016 ‘Doing Business’ issued by the World Bank. Therefore these studies and reports mitigate the chances of risk and concerns which could have possibly interrupted us then. Moreover, France has a highly skilled workforce, easy availability of resources for large industries and it is centrally located in Europe, which can work to our great benefit.
France comes under top 10 economic powers in the world and is located centrally in Europe. France has a well-developed tertiary sector and it is a very innovative country. This not only helps us understand France market but it also provides us a platform to prove ourselves in a country which offers us a large fashion market. Infrastructure of the country is of high quality and it has a large industrial base. France has a very skilled, productive and qualified workforce which comes second in terms of hourly production in Europe. This can help us have effective and efficient people working with us who have significant higher local market’s knowledge. France has a very simple legal system with stable and transparent policies and compliance. It has a low manpower cost and less competition in some sectors, this also helps us have efficient and cost effective staff.
However, there are some weaknesses also related with investing in France. Taxation rates are high as compared to other regions of Europe. There are some labour rules which may create complexity in compliance with labour law. This is an area of concern which needs to be worked upon and analyzed before we fix onto our commitment to invest in France.
Government of France has taken many measures to eliminate above mentioned weaknesses. According to foreign direct investment (FDI) policy of France, a foreign company which decides to start their business operations in France and want to expand its existing business by investing in France will be treated as a French company by the government. Government of France has also reduced no. of administrative formalities to make its procedure simple and less complex for foreign companies which wants to establish business in France. This has made the investment decisions comparatively easier and made the procedures compliant friendly.
Further, it has also implemented various programs (corporate tax credit program) to fight financial crisis and to attract investors they have removed corporate solidarity tax. They have created new labour laws to make French labour laws more flexible and to improve vocational training programs. The government has also introduced tax incentives for new innovative companies. This has made the laws and regulations investor friendly and also shows an interest of the government to invite investors from the globe to work in France.
Next Plc has to fight with growing retail market of the United Kingdom as many overseas companies are using the United Kingdom as a base for the expansion of their overseas clothing retail business. For example, Giordano a famous Asian retailer of Hong Kong and it is highly popular and successful in Asia. The other competitors of NEXT are Marks and Spencer (M&S), Debenhams and Arcadia Group. Marks and Spencer is the main competitor of NEXT Plc followed by Arcadia Group at number two in retail clothing. We have to establish only 15 more stores to get equal to Marks and Spenser (M&S) in retail clothing business. Marks Spenser and Debenhams has invested huge amount in their online / internet business therefore to fight and compete with them we have to expand our overseas business also as we are dealing with products which are almost equal and just having a different brand label. Therefore we have to mint every opportunity that can accelerate our earnings.
A foreign company can purchase its own leasehold or freehold industrial building, land and commercial premises. They can buy them through real estate company established in France. Foreign direct investment policy allows foreign companies to invest in properties for their business operations. This proves to our advantage as direct investment in France will help us reduce our other costs of lease etc. and also help us have a brand under our owned roof in an overseas market.
Risks Associated With Expansion Decision:
A wrong business strategy adopted by the board or any wrong implementation of strategy the board may lead to future problems and in turn the business suffers. We need to be very careful while implementing the strategies as they form a basis for our growth. The strategies need to be properly understood, managed and analyzed by the board so that their implementation can result in long term future growth of the business and its stakeholders. The business strategies however are generally reviewed by the board regularly to monitor the sales and profit budgets effectively and to lead to effective management of business operations. Shareholder’s value increment is major concern areas which is involved in this process wherein annual budgets are set and long term financial models are made. Further to this, the industry growth worldwide and the change in industry standards across the globe are critical area for business and group’s concern.
The major part of financial risk for Next pertains to the funds availability to meet business needs, fluctuations in foreign exchange and in interest rates and defaults done by its counter parties towards financial transactions. Further to this, Next’s business expansion plan and its buyback of share strategy may force the need of additional finance which can give rise to variations in profit by increasing interest costs. A high debt level can also result in increase in cash flow proportion which was dedicated to serve debt and can possibly increase its exposure towards interest rate fluctuations. A centralized treasury function of Next manages its liquidity, foreign currency risks and interest. The treasury policy of the group allows using derivatives subject to the fact that the derivative instruments are not entered for speculative purpose. Further, Next is supposed to provide funds for its defined benefit scheme for pension and ensure that enough contributions have been made to meet the outstanding liability as and when they fall due. In case Next does not provide sufficient and timely funds for the contributions, actions can be taken either by the pension scheme trustees or by the regulators of pension which can in turn result in increase of overall deficit. Management for the purpose of monitoring meets the trustees of the scheme regularly to assess the performance of fund and also to decide future levels for contributions and any necessary changes if required for the benefit of the members of the scheme.
Cash, bank overdrafts, corporate bonds, loans and short term deposits form principal financial instruments of the group other than derivatives. The main reason for these financial instruments is to raise funds for the operation of group. Trade receivable and payables are other financial assets and liabilities of group which arise directly from its operations.
The Board continuously identifies and reviews key business risks and development processes undertaking oversees so as to ensure that these type of risk are managed and mitigated properly.
The main kinds of risks are discussed as below:
Credit risk is a kind of risk which surrounds Next due to its directory and other business customers. Various stringent procedures and followed to regularly review and monitor Group’s credit customer. Credit risk also encounters the suppliers whose services are necessary for smooth running of our business operations. These include provision of IT systems, printing of directory etc. In case any of the supplier fail during the course of business this risk assessment procedure of the Group helps it to recognize various alternative and also to develop contingency plans. This helps to keep an eye on the liquidity of the company and that of the group as a whole so that unforeseen liquidity crunch does not surround and hamper the growth of the company. The Group also maintains proper long term and medium term planning to support its business operations in such kind of situations and also for probable future. The board keeps an eye on the economic conditions within UK and also globally to mitigate any exposure it may face. To decrease unnecessary interest expenses the group tries to manage its cash and borrowings centrally, this is managed in between the risk parameters which have been defined by the board.
For its fixed rate corporate bonds, group is exposed to fair value interest risks and for floating rate loans and overdrafts from bank it is exposed to cash flow interest rate risks. The profile containing cash and borrowing is being monitored by the board on a regular basis so as to minimize and mitigate the risk for fixed and variable rate debt. To reduce its exposure towards change in interest rate or fluctuations in rate of interest, the group tries to use interest rate derivatives instead. These interest rates derivatives help to minimize the amount of risk by the capping the interest amount so as to reduce fluctuations and loss.
The foreign currency exposure for the group arises when it gets into the purchase for overseas products. The policy for the group allows but it does not demand for these exposures to be hedged upto 18 months in advance to fix the cost. The hedging activity includes the usage of spot, option and forward contracts. The board regularly reviews the market value of outstanding foreign exchange derivatives and a cover is taken depending upon the market conditions and the conditions of the industry as a whole. In relation to translation of overseas assets and liabilities the group does not have a material exposure and hence it does not plan to hedge for any such exposure. The hedging activity helps to reduce the foreign exchange loss which can be suffered due to fluctuations in currency and interest rates.
To manage its foreign currency exchange risk the group uses derivatives instruments for its future purchases which are sourced overseas for up to 18 months ahead. These derivatives generally includes currency options and contracts whose terms matches with the terms of its expected purchases.
Financial Consideration:
In order to finance our expansion NEXT Plc. will raise funds through long term borrowing options such as long term loans, Bonds, debentures, etc. because our treasury department is good in hedging interest rates fluctuation by taking interest rate swaps.
Allocation of Expansion budget:
Initial expenses – €200,000
(Legal, rent, insurance, R & D, expensed equipment, consultants, etc.)
Assets – €500,000
(Production equipments, office equipments, other assets)
Cash balance – €300,000
€1,000,000
Sales Forecast:
Statement showing projected sales along with all the estimated expenses for calculating projected Profit and Loss for first 3 years of operations in Paris:
|
Projected Profit & Loss |
|||
|
Particulars |
Year 1 |
Year 2 |
Year 3 |
|
Sales revenue |
€ 800,000 |
€ 1,000,000 |
€ 1,500,000 |
|
– COGS (60 % of revenue) |
€ 480,000 |
€ 600,000 |
€ 900,000 |
|
Gross profits (a) |
€ 320,000 |
€ 400,000 |
€ 600,000 |
|
Expenses: |
|||
|
Rent |
€ 36,000 |
€ 36,000 |
€ 36,000 |
|
Pay roll expenses |
€ 30,000 |
€ 30,000 |
€ 30,000 |
|
Advertisement |
€ 40,000 |
€ 40,000 |
€ 40,000 |
|
Selling & distribution expenses |
€ 80,000 |
€ 100,000 |
€ 150,000 |
|
Depreciation (15%) |
€ 17,250 |
€ 17,250 |
€ 17,250 |
|
Other operating expenses |
€ 20,000 |
€ 25,000 |
€ 16,000 |
|
Total expenses (b) |
€ 223,250 |
€ 248,250 |
€ 289,250 |
|
Profit (or Loss) before taxes (a-b) |
€ 96,750 |
€ 151,750 |
€ 310,750 |
In first year of operations we have to maintain low introductory price to attract more customers. This will attract the customers with low prices and as they start using and liking the products we can raise the bar there on. Therefore, from 2nd year onwards sales price will be increased to cover operating expenses. Cost of production however will remain same during the first three years and there will be no increase in salaries. In order to increase sales volume we have to incur more advertisement expenses in coming years, this will help us to create a brand recognition for our product.
Other than overseas expansion we have to take actions for our existing business operations in order to increase our market share therefore I would like to give following recommendations:
Our analysis reveals that to achieve a top position in the market we have to increase advertisement (specifically TV ads) for increasing our sales. This advertisement strategy will help us in increasing our brand value and product image. This will help us increase our reach to the customer we have to been able to touch base upon. Since we have to fight with our major competitors therefore we have to increase our online shopping customers who shop our product from our Directory sales facility. Online market is growing at a great speed and this will at some point and time force us to spread our reach over internet world as well. We have to improve our core strategy of ‘Delivering products to the doorstep on the next day if order is placed till midnight’ in order to give more completion to our competitor Marks Spencer. We should provide 3D body scanner at our stores so that we can take accurate and precise body measurements of our customers. Since our main target market adult fashion wear (that ranges from 25 to 45 age group) is reducing comparatively therefore we also have to advertise for kids clothing in order to improve sales and make up for the reduced market there.
We should also start cost cutting programs by adopting better cost management system, making stock management more efficient and improving gross & net margins. The increase in investment and the increase in advertisements for our extended reach will make the expenses manifold therefore to keep a control over the cash flow and net profitability we will have to manage the cost effectively. NEXT plc’s main aim is to increase shareholders wealth therefore we have to enhance interest of our shareholders by purchasing our own shares with excess earnings. We have to increase our market share rapidly in order to improve our financial strength and to give tough competition to our competitors. We have to revise our pricing policies and decisions so that we can sell our products at more competitive prices. We should provide our customers better services, stylish and trendy designs, better quality and improve order timings. Better customer service is one way through which we can gain loyal customers and retain them for a longer period of time. We have to allocate more funds towards brand development so that we can increase our brand value in the market. We have to stick with our objective of increasing selling / trading space and increasing our retail clothing outlets across the globe, but we must note that every new store have to maintain standard and quality as per companies policy. We have conducted a survey which reveals that many of our stores needs renovations and improved customer services. These make our products and services more competitive and better to display in the growing fashion world. In order to compete with Marks and Spencer (M&S) we have to increase our number of stores outside the United Kingdom i.e. we have to expand our business in overseas market to cover more market area. This will not only help us increase our sales manifold but also help us reach a lot of customers which we would have not been able to reach if we would have restricted our steps within the country.
We have also conducted the SWOT analysis with the help of external professionals and it shows that in the next 10 years our sales may fall because of our main target customers (25 & 45 age group) are moving out. Therefore in order to increase sales in future we have to expand our operations into new target group. We have not tried our hands in sportswear segment till now so it is the best time to cover this new target market to improve our sales, this will not just improve sales but also help to increase our brand recognition. Till now our regular customers have to buy sportswear from our competitors therefore we have to cover this market also. We can launch a new sportswear brand for this new target market. Many of our regular customers have demanded a resting place in our stores so that they can relax and can take drink during shopping, Marks and Spencer has already adopted this facility in its stores. We will have to conduct fashion events, shows, organize free make-up studios for one day in order to attract new customers.
To concise my report, NEXT Plc. have to fulfill its mission statement and my recommendations in order to multiply its growth and to make its position top in the future market. It has to concentrate on its product quality, design, customer service and delivery strategies.
Reference:
Export Enterprises, 2016, ‘France – foreign investment’, viewed on 16th March 2016 _ https://en.santandertrade.com/establish-overseas/france/foreign-investment
Hausarbeit, 2001, ‘Analysis of Next Plc.’, viewed on 16th March 2016 _ https://www.grin.com/de/e-book/102251/analysis-to-next-plc
Business Finance, 2010, ‘International business finance’, viewed on 16th March 2016 _ https://www.economywatch.com/business/business-finance/international-business-finance.html
NEXT PLC, 2016, ‘Strategies and Objectives’, viewed on 16th March 2016 _ https://www.nextplc.co.uk/about-next/our-strategies-and-objectives
NEXT PLC, 2016, ‘Reports and presentations’, viewed on 16th March 2016 _ https://www.nextplc.co.uk/investors/reports-and-presentations/2015-16
NEXT PLC, 2016, ‘Risks and uncertainties’, viewed on 16th March 2016 _ https://nextplc.annualreport2015.com/business-reports/strategic-report/risks-uncertainties
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