International Marketing - 24220 - Final Report PDF

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Executive SummaryThis report provides an in-depth analysis towards the current and prospective opportunities the Chinese footwear market holds for Hype DC. The methods of analysis used within this report include a situational analysis, an analysis of Hypes market objectives and strategies, a financi...

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Executive Summary This report provides an in-depth analysis towards the current and prospective opportunities the Chinese footwear market holds for Hype DC. The methods of analysis used within this report include a situational analysis, an analysis of Hypes market objectives and strategies, a financial analysis and a scope of methods that Hype can use to ensure they successfully integrate into China and experience long term profitability. Further information can be found in the appendix.

The situational analysis found that the Chinese shoe market is entirely dominated by domestic competitors such as Belle International Holdings Limited, Red Dragonfly and Daphne International Holdings Limited. While the strength of these competitors could inhibit Hype's success, it also provides them with the opportunity to penetrate the market through forming partnerships with their top competitors. However, the current political climate of China as well as Hype’s limited international presence will impose threats, as many of the social media platforms in which Hype relies on for marketing have been banned in China, and the social and cultural differences between the home and host country may lead to the development of culturally insensitive marketing messages. It was further found that China is one of the best markets to internationalise from an economic perspective, as they have had a consistently high GDP for the past 10 years, strong government support towards ecommerce transactions and rising disposable incomes across the population.

An analysis of Porter’s 5 Forces further found that the threat of new market entrants, threat of substitutes, the bargaining power of buyers and the competitive intensity within the Chinese shoe industry is extremely high. This is due to the volume of alternatives combined with the market being dominated by smaller stores, thus reducing points of differentiation and creating price wars between competitors. Our in-depth financial analysis and three year sales forecast further found that Hype will not break even in their first year within the Chinese market, however for the subsequent two years they will experience sustained profitability growth. It was also found that the Chinese footwear market is expected to experience annual growth over the next five years, which will foster Hype's gradual opening of stores and integration into the market.

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02 Executive summary 04 Introduction 05 Situational Analysis 05 05 07 09 10

Internal Analysis PESTEL Market Analysis Competitor Analysis SWOT

12 Marketing Objectives & Strategies 12 13 14 15 16

SMART Objectives Target Market Entry Mode Marketing Mix Market Positioning

16 Financial Analysis 16 08

19 19

Forecast Sales & Costs Breakeven Analysis

Implementation & Control Conclusion

20 References 23

Appendices

Introduction Hype DC is a well-established business in Australia and New Zealand. The business has become one of the biggest sneaker retailers in Australia and New Zealand. It is the time for Hype DC to

CONTENTS

internationalize and expand their business to another country. After conducting an analysis, China is chosen as the target country. There are a lot of opportunities in China’s sneaker market. This report will give an insight of the opportunities in China’s sneaker market by conducting

situational analysis, an analysis of Hypes market objectives and strategies, a financial analysis and a scope of methods for Hype to enter the market.

Background of the Company

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Hype DC is a retailer who specializes in selling premium, name brand sneakers at

retail prices. As of today, Hype is one of the leaders in the sneaker industry in Australia and New Zealand. This has been achieved through their focus on providing timeless

and classic sneakers that remain on par with current and future trends (Hype DC, n.d). Aside from casual sneakers, Hype also offers dress shoes, Chelsea boots, and oxford shoes to broaden their customer base and sales opportunities. Hype can be found

across Australian shopping centres and they carry brands such as Adidas, Nike, Puma, Dr. Martens, R.M Williams, New Balance, Vans, and Lacoste (Hype DC, n.d). Hype also stocks limited edition sneakers such as The Simpsons x Vans Collection.

Reason Behind Internationalization In this report, our group proposes that Hype DC expands their business offerings into the Chinese market. During the last 4 years, the sneaker culture has emerged as one of the biggest trends all around the world. As such, in 2018 the sneaker industry earned 58 billion US dollars and is still experiencing exponential growth on a global scale (ReportBuyer, 2019). Hot sneakers brands such as Nike, Adidas, and Air Jordan are also starting to collaborate with artists and other, sometimes designer brands, which increases the exclusivity and reputation of the industry. Air Jordan, owned by Michael Jordan, has released several collaborations with the popular rapper Travis Scott and Adidas has collaborated with the rapper Kanye West to create a new brand line called Yeezy. As the quantity is limited, these sneakers often sell out instantly, with people being willing to pay more money than the original price to own them. This has been demonstrated through the Dior and Air Jordan collaboration, as both brands are very popular which triggered a high level of demand despite the expensive price tags. The most popular item of that collaboration is the Air Jordan 1 Dior sneaker which has a retail price of

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$2000 (StockX, n.d). That item is sold on the market for $10,000 which is 5 times the retail price and shows that sneakers are a big part of people’s life and demand for them is growing (StockX, n.d). However, the price of limited-edition sneakers is relatively high and not affordable for everyone. People that are not willing to spend thousands of dollars on sneakers but still want to look stylish and trendy will opt to purchase regular, premium sneakers, which is exactly what Hype sells for between $100-$300 AUD.

Due to Hype’s current market position and success within Australia and New Zealand, their access to financial and physical resources has provided them with a strong opportunity to expand to another country. Hence, Hype’s internationalisation to China will be fostered by the market's current sneaker culture, the limited availability of international brands in China, and the close distance to Hype’s main suppliers. At the present time, the footwear and sneaker industry within China is dominated by local brands such as 361, Li-Ning, Anta, and Feiyue, well-known brands such as Nike and Adidas also have select retail stores within China. Despite the competitive threats within the market, Hype offers a variety of brands that are hard to come by without running the risk of them being counterfeit products. Furthermore, the brand diversity offered by Hype will make them one of the go-to places for sneaker shopping, as their broad range of offerings promotes customer convenience and a relatively laid-back shopping experience. The state of the global sneaker market combined with China having the largest population in the world will also ensure Hype has access to a sustainable level of demand when executing their internationalisation plans. Additionally, China is a country with four noticeable seasons, making sneakers and boots essential items during the winter period. This will further enhance the market demand for Hype, as their customer base will seek new items to suit the yearly season. Lastly, China has a booming manufacturing industry, which will enable Hype to access and transport their final offerings to stores at a reduced cost.

Situational Analysis Internal Analysis Macro-Environmental influences (PESTEL Analysis) In order to successfully internationalise into China’s footwear market, a thorough analysis of the PESTEL framework is imperative. As such, the scope of PESTEL will provide Hype with relevant knowledge and insights towards their external environment, allowing them to identify the most effective market penetration method and achieve long term success.

Due to the nature of Hype’s market penetration plans and their heavy reliance on an e-commerce strategy, it is essential that they understand the relevant rules and regulations within the Chinese

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market. As such, Hype will need to abide by the internet usage restrictions within China, as the government determines the availability of Wi-Fi. Hype would also need to contact the Ministry of Commerce, People's Republic of China (MOFCOM) Department of Market Supervision as it is the leading government agency that handles the retail industry in China for permission to operate (USCBC, 2010). It should also be noted that government policies heavily regulate how e-commerce is operated within China. However, despite this regulation the government introduced a 5-year plan that saw the creation and implementation of various laws in 2011 and 2015 that are designed to foster the development and growth of the e-commerce sector (Merkle Company, 2019). Furthermore, the Chinese government specifically supports online only, multi-channel and third-party e-commerce retailers through introducing a new legal framework called the 12th Five-Year Plan for E-commerce Development (Shira, 2013). This will be extremely beneficial for Hype’s expansion into China, as our planned penetration follows an e-commerce structure that can reach mass sections of the market, as this industry has seen a 45.6% increase in its use and popularity since 2009 (Statista, 2009).

From an economic perspective, China is one of the best international locations for Hype to expand to due to their consistent economic growth over the last 10 years and consistently high GDP, which averaged at 9.5% in 2018 (Every CRS Report, 2019). Despite their economic decline during the Coronavirus pandemic, they have fared relatively well in comparison to other countries, as their temporary yet extremely strict lockdown restrictions enabled them to move past the outbreak and rejuvenate the economy. However, inflation rates have been on the rise in China, as they went from 1.56% in 2017 to 2.9% in 2020, which could increase Hype’s operating and sourcing costs during their internationalisation. The social environment in China is very collective, with the population becoming more educated as a whole, bringing the literacy rate of rural China up to the standard of city residents (China Power, 2020). The average incomes of Chinese households are also increasing at a rapid rate, which can be seen in Figure 1.

Figure 1: Graph showing the annual increase of household incomes in China This has resulted in many 18 to 22-year old’s purchasing well known, high-end products and further provides a gateway for Hype to stock more of their limited-edition sneakers during their expansion, as they will be more suitable and aligned to the demand of their target market. Moreover, this increase in wealth has seen consumers purchase more internet accessible devices than ever before. This has ultimately contributed to a sharp increase in the use of e-commerce stores within China, as internet

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sales make up 3.2% of the country’s total GDP, with this set to increase to at least 5% by the end of 2020 (Hedley, 2020). Thus, this justifies the e-commerce intensive penetration strategy we are suggesting, as Hype will have a maximal reach across the country that brick and mortar stores do not provide, as well as the ability to focus on selling larger quantities of limited-edition shoes.

Chinese laws are traditionally quite lenient when it comes to the environmental responsibility of companies, however the 2014 Climate Summit in China has pledged to reduce their pollution levels significantly through creating new laws and stricter operating standards (Duggan, 2014). Future laws may limit what materials Hype can package their shoes in and may also impose problems on the thirdparty shoe suppliers and manufacturers they rely on. Furthermore, it is recommended for Hype to enter the Chinese market through a joint venture, as these agreements significantly reduce start-up costs and allow for a seamless entry. It is recommended they enter the market with Tmall who is one of the most popular online retailers in China, with a 27.8% market share which would offer Hype the maximum level of market exposure if their products were on the platform

Furthermore, Hype must ensure their website content is cleared by the MOFCOM’s Department of Market Supervision, who control what is permitted through strict censoring laws (Fang, 2018). Hype should also be aware that while employee rights within China have significantly increased over the past decade, they are still poorly regulated and enforcement bodies often issuing heavy fines for employee mistreatment (Di, 2008).

Market Analysis (Porter’s Five Forces) At the present time, China’s retail market is extremely fragmented, with the market being subjected to a strong presence of small stores, as opposed to large, powerful chain companies. Furthermore, the availability of foreign chains is low for Chinese consumers, as they only make up approximately 5% of their total retail market (USCBC, 2010). Thus, entering China will provide Hype with an abundance of potential opportunities and growth prospects. However, they will still be subject to potential threats which can be better analysed through the scope of Porter’s 5 Forces.

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Threats of New Entrants The aforementioned domination of smaller retail stores within China’s footwear market increases the threat of new entrants, as local start-ups have a thorough understanding of the market's social and cultural standpoints and general insider insight. This is further fuelled by the monumental growth of China’s e-commerce sector, as small retail start-ups have complete access to the entirety of China’s market and can experience exponential success. Thus, the need for differentiation and innovation is of high importance for retailers within China’s market and further contributes to high levels of competitive pricing and price wars.

Bargaining Power of Buyers Due to the high number of available retail options within China, the bargaining power of buyers is extremely high as many products are of similar quality and design with similar prices. This places a great level of pressure on Hype to penetrate the Chinese market with points of differentiation, as they will need to attract customers to their store. This will be fostered by the recommended e-commerce strategy, as Hype will provide a high level of accessibility to their products for all consumers across the country.

Bargaining Power of Suppliers The bargaining power of suppliers is relatively low due to the aforementioned large number of other retailers available, as consumers in China are becoming more price sensitive and also increasing their brand awareness (PwC, 2019). Despite prices being a large determining factor for the purchase decision of Chinese consumers, they still often prefer the more luxury brands. If a product will signal a high purchasing benefit then the consumer will happily pay a premium price, however if it does not they often very price sensitive. Furthermore, 10% of luxury goods are sold online in China, with expected forecasts for this to 12%. The accessibility of these products has increased exponentially which has correspondingly reduced switching costs, ultimately reducing the overall bargaining power of suppliers significantly (CPP Luxury, 2020).

Threat of Substitutes The threat of substitution for Hype is extremely high due to the level of saturation within China’s footwear market and the accessibility for customers to purchase alternatives. As a result, Hype should focus on marketing their more premium, limited-edition offerings that have lower comparable alternatives and stock availability. However, this will not eliminate the threat of substitutes, only reduce it by a notable level.

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Intensity of Competitive Rivalry The competitive rivalry within China is extremely high, with knock off brands and illegal copying of trademarks being extremely common. There are many laws to protect trademarks and copyright, however they are very poorly enforced with many Chinese versions of western brands existing within the Chinese market. The total Chinese retail market accounts for 21% of the global retail market and is set to overtake the US by 2021 (Statista, 2020), it goes without saying that the level of competition in the Chinese market would be extremely heavy, however the planned e-commerce penetration in conjunction with the Tmall partnership will assist in reducing the level of competition.

Competitor Analysis Belle International Holdings Limited Belle International Holdings Limited specialises in the manufacturing and retail sales of women's footwear. They were founded in 1978 and have since opened 150 stores in China, and 35 stores in Hong Kong, Macau and the United States (BizVibe, n.d.). At the present time, Belle is one of the largest women's footwear distributors in China, as they hold approximately 25% of the market and have annual revenues of AUD 8.9 billion (Forbes, 2017). Belle International Holdings Limited also own an abundance of famous footwear brands that include, but are not limited to, Staccato, Belle and Joy & Peace, Clarks, Fitflop and Hush Puppies (Belle Int, n.d.).

Red Dragonfly Red Dragonfly is also a dominant force within China’s manufacturing and retail sectors who specialize in leather shoes and apparel (BizVibe, n.d.). Contrastingly to Belle International Holdings Limited, Red Dragonfly takes a broader approach through producing shoes for men, women and children, as well as leather apparel such as belts, wallets and handbags (Financial Times, 2020). After their formation in 2007, Red Dragonfly has internationalised across Asia, Europe, Japan and Korea, with a current employee base of 51,000 people and annual revenues of AUD 525 million (Financial Times, 2020).

Daphne International Holdings Limited: Daphne International Holdings Limited was founded in 1987 and currently has 80 stores across China as well as a small presence in Europe and North America (BizVibe, n.d.). The company currently employs 30,000 workers across their broad supply chain and makes upwards of AUD 170 million on an annual basis (Financial Times, 2020). At the present time, Daphne International Holdings Limited

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operates under multiple groups of subsidiaries with Daphne, Shoebox and Arezzo being the most popular for their fashion and accessory offerings (Financial Times, 2020) .

SWOT Analysis Strengths The top three footwear companies in China are Belle International Holdings Limited, Daphne International Holdings Limited and Red Dragonfly Co Limited, who are all domestic to China (BizVibe, N.D). Furthermore, over the decades China’s economy has massively increased which has been built on the backbone of its industrialization (Verot, 2016). More people are moving into the middle-class bubble and as a result, people have increased their spending and are willing to pay a premium price for imported or international offerings. If Hype were able to expand into China’s footwear market, they would acquire a competitive advantage as they can provide a wide variety of international brands at standard retail prices. The shoe reselling market has also become one of the biggest and fastest growing markets in China, with people being forced to pay a reselling premium due to a lack of variety and stock availability (Boon, 2019). There are Chinese sneaker trading platforms like Poizon, that generate approximately 3.1 billion AUD per year by solely reselling other companies’ products for extortionate price points (Deng, 2019)...