Background of H & M in Portugal 3
Business Environment 6
PESTLE Analysis 7
Porter’s Five Forces 11
Demand Supply Scheme 12
Reference List 14
The expansion of business activities in the modern world is one of the indicators of business competitiveness that all owners pursue in a bid to win and retain new market niches. The modern international market is characterised by massive dynamism and extreme competition for the best markets in different regions. Before businesses launch their operations in different new markets, there is always a great need for the management to obtain thorough knowledge about the prevailing business environments to put in place the appropriate business mechanisms for the investment to succeed in the new market. Such knowledge is obtained through the analytical pre-scan of the target environment to ascertain any underlying risks and opportunities in a bid to establish the environment’s viability for investment. FDI establishments must obtain a thorough knowledge of the prevailing business environments in their foreign markets before starting their operations. They should clearly understand the existing aspects such as legal, political, social, and economic conditions in foreign countries that could affect their business operations. This paper will delve into the environmental evaluation of the Portuguese apparel market as HM intends to open a new outlet in Corroios, Portugal. Since the business signed the first contract to open its operations in Portugal in 2002 and the subsequent inception of its activities in the country in 2003, the business has continuously expanded in the region, and the step to open another store in Corroios shall be guided by the careful examination of the prevailing business environment.
Background of H & M in Portugal
The history of the company in Portugal dates back to 2002 when its executives signed a contract for the launch of its operations in the country before the first store was opened in the spring of 2003. Ever since, the business has continuously expanded its operations in the country (H& M Group, 2002). Over the years, the business has increased its market coverage through its wide variety of brands all of which are characterised by unique identities. The business success in the country and other regions in the world are centred on outstanding quality and sustainability. It offers a wide range of brands, including H & M, COS, Monki, Arket, Afound, among others. Among the groundbreaking sustainability milestones achieved by the company in the recent past is the increment of its use of recycles and other sustainably sourced materials to 35% as well as the reduction of harmful emissions by 21% (H & M Group, 2018).
Fig. 1: H & M Sustainability – (H & M Group, 2018)
The company’s global sales have maintained relative stability over the last three years, and the launch of a new outlet in Portugal would significantly boost the company’s success in the region. The decline in operating profits from 26,942 in 2015 to 20,659 in 2017 could be attributed to the increasing competition in the global apparel market. Therefore, continuous expansion of the business outlets will significantly boost the business’ efforts to reclaim its glory in terms of profitability.
2015 2016 2017
Sales including VAT, SEK m 209,921 222,865 231,771
Sales excluding VAT, SEK m 180,861 192,267 200,004
Change from the previous year in SEK, % 19 6 4
Change from the previous year in local currencies, % 11 7 3
Operating profit, SEK m 26,942 23,823 20,569
Fig. 1: H & M Sustainability – (H & M Group, 2018, p50)
According to the company’s market overview for 2017, the business successfully opened an additional outlet in Portugal to own a total of 31 stores in the country by the end of the year. Further, its sales in the Portuguese market increased from SEK 1,272 million in 2016 to SEK 1,316 million in 2017 (H & M Group, 2017, p.47).
Portugal Market Overview: (H & M Group, 2017, p.47)
With the current ownership of only thirty-two stores in Portugal, the opening of an additional store in Corroios by the business would be a bold move to enable the business in the massive exploitation of the European market in the country and beyond. The successful launch of such a business activity in the country shall be backed by the in-depth examination of the business environment to ascertain its viability for the investment.
The prevailing factors in a business environment, especially in the case of FDI, are critical for the determination of the viability of an investment in the specific environment. All business activities in a foreign jurisdiction are significantly affected by the prevailing business environment. Therefore, the quality of a business environment in a country plays a critical role in the attraction and retention of substantial FDI operations (Bobenič-Hintošová, 2016, p5). Business environmental factors such as the regulatory framework are critical for the attraction and retention of FDI to the host countries through their direct and indirect influences on the costs of “doing business” (Zhang, 2012, p97). The business environment in Portugal is characterised by a wide range of characteristics that have significant effects on the proposed expansion of H & M Group in the country. Like all other jurisdictions, the Portuguese business environment has specific factors that support the proposed FDI expansion while others could possibly pose significant challenges.
FDI in Portugal (Export Entreprises SA, 2018)
The political, social, economic, technological, and legal factors in the Portuguese apparel market are critical for the determination of the business’ activities in the region. To ascertain the viability of the Portuguese market for the proposed expansion by HM, the country’s business environment will be evaluated through different analytical frameworks such as PESTLE, Porter’s Five Forces, and the demand-supply scheme to establish the extent to which the proposed expansion would succeed.
PESTLE analysis examines the political, social, economic, technological, legal, and environmental factors affecting business activities in a specific jurisdiction as a way of evaluating the business environment. In the case of HM and the proposed expansion in Portugal, the evaluation of the country’s political scene is inevitable. With the business activities being centred on fashion, whose purchases are highly emotional, the geopolitical environment of the country will highly affect the success of the investment (H & M Group, 2017, p66). In the political arena, Portugal has for decades enjoyed national democracy founded on the pluralism of expression that has significantly contributed to the country’s peaceful coexistence, thereby providing an enabling business environment. The stable political establishment of the country has also played a critical role in the membership of the country to other regional trading blocs such as the WTO and the EU, all of which would be critical for the new establishment through partnerships and suppliers’ sourcing. Portugal has been ranked the most attractive country for FDI in the EU region, with 65% attractiveness attributed to major political and economic milestones (E & Y, 2018, p28). The increased political stability is also evidenced by the country’s ranking as the third most peaceful country in the world and the first in Europe (E & Y, 2018, p11). Political stability is a great source of attractiveness for the country.
Fig.3: Portugal’s attractiveness to FDI, (E & Y, 2018, p32)
The stable political environment in Portugal is also attributable to the minimal corruption levels, which is deemed an addition to the country’s attractiveness for FDI. By 2015, Portugal’s Corruption Perception Index rank was 63 according to the Transparency International report issued in the year (Epaphra and Massawe, 2017, p24). Since corruption has historically been classified as a major hindrance to local and foreign investment, the negligible levels of corruption in Portugal have significantly contributed to the favourable business environment. The attractiveness of the Portuguese business environment is partially attributed to the low corruption levels because research has established that corruption is a potential reducer of FDI in different countries. The reduction in FDI within corrupt jurisdictions is attributed to the increased uncertainty for the investors as well the costs of conducting the business as investors are compelled to pay more funds in bribes (Castro and Nunes, 2013, p90). Therefore, the Portuguese abstinence from corruption makes the business environment conducive for the proposed expansion by HM.
In the modern globalised world, the economic factors acting on any business environment are critical for the determination of the environment’s attractiveness to FDI. First, the country’s attractiveness to FDI is rooted in that the country’s economy is constantly growing and innovating. The economy is also ranked as a moderately free economy, thus its attractiveness for investment (E & Y, 2018, p10 – 11). The country’s economic atmosphere is reasonably attractive to FDI due to various attributes such as the advanced telecommunication infrastructure that is critical for any business. The government policies regarding FDI have also been streamlined to encourage FDI through incentives such as simplified tax systems. The establishment of AICEP was another economic milestone for the improvement of the country’s economic attractiveness to FDI. For instance, HM can rely on the AICEP website to identify new investment opportunities in the country and seize them. The country also operates a Foreign Trade Zone/ free port in Madeira where HM can establish an import centre to enjoy the different tax, financial, and non-financial incentives for the new investment. The Portuguese economy is also open to the external world through the different bilateral agreements of the country with over fifty nations outside the EU (Export Entreprises SA, 2018). In addition, the existence of the country within the EU is a critical advantage for proposed expansion since the business will be able to enter into multiple trade agreements and partnerships with different suppliers within the trading block.
The social setting of the country is another source of attractiveness for the business’ proposed expansion. The social stability of the Portuguese business environment ranks at 86%. The increased political stability is also evidenced by the country’s ranking as the third most peaceful country in the world and the first in Europe (E & Y, 2018, p7). The country enjoys a mid-sized population base with high affinity for apparel products, which will be useful for the success of the business. Therefore, the social positioning of the country would significantly boost the proposed expansion of the business.
In terms of technology, Portugal has been classified as a growing jurisdiction in terms of innovation. The country’s competitiveness in technology readiness and innovation are strong pillars for the country’s business environment (E & Y, 2018, p11). The country’s Technology Infrastructure is significantly advanced following the significant technology-push policies adopted by the government to advance R&D in technology (E & Y, 2018, p27). The country’s advanced technology will be critical for communication within the business and outside. It will also significantly boost the e-commerce efforts by the business to emerge competitive among other FD investors. Overall, the country’s advanced technology and its pursuit of innovation will play a significant role in boosting the new establishment.
The legal framework in a country also plays a critical role in determining the attractiveness of the business environment to FDI. The political stability in Portugal has made it possible to have a favourable legal framework for the establishment of FDI entities (Zhang, 2012, p98). Favourable business regulations such as subsidies for the FDI in Portugal are major features of the business environment. With the EU membership, the domestic markets in Portugal are not highly regulated, as FDI is a critical driver of economic growth of the country. Therefore, the Portuguese business environment will significantly support the expansion proposal.
Businesses venturing in FDI cannot avoid the environmental guidelines in the prospective markets. The Portuguese government and the EU region are strict with environmental matters, especially with the reduction of harmful emissions, energy efficiency, and sustainability. As such, the company’s agenda to minimise harmful emissions while increasing the utilisation of recycled materials and promoting water and energy sustainability will perfectly match the investment agenda (Moreira, Vasconcelos, and Silva Santos, 2017, p375). The business is committed to green operations that will significantly increase its compatibility with the environmental legislation, thereby increasing its success chances.
Porter’s Five Forces
The apparel sector in Portugal is characterised by stiff competition due to the numerous businesses operating within the sector in the country. Moreover, major competitors such as Zara, Uniqlo, and Gap are strongly established in the Portuguese market. Therefore, the business may require a robust strategy to counter the threat in the Portuguese market (Manish Institute of Management, 2010, p143). The established brands in the market are a major threat due to the degree of loyalty and customer base they command in the market. However, since HM is not a new establishment, the new store will leverage on the business’ competitiveness in the country.
The threat posed by new entrants in the Portuguese Apparel market is moderate informed by the significantly high initial capital requirements for a start-up. Moreover, the accession of the country to the EFTA in 1960 has resulted in a high level of trade liberalisation (Manish Institute of Management, 2010, p144). The situation has opened up the Portuguese market to new investors. The existing loyal customers to the business will continue being clients to the business, thus eliminating the threat posed by new entrants.
The bargaining power of buyers in the Portuguese market is significantly high because of the wide range of varieties offered by the competitors. Other competitors such as Zara offer similar products at competitive prices, which gives the consumers a wide pool from which to choose their products. This creates the need for competitive pricing strategies. In addition, differentiation may be a strong strategy for the business to counter the bargaining power of buyers. Besides, the high level of competition in the market triggers high buyer bargaining power.
The bargaining power of suppliers in the market is moderate. First, the suppliers are manufacturers who are the legal owners of their products. Therefore, they may dictate their prices in times of high demand or uncertainty. In addition, the suppliers’ bargaining power may rise due to the large market for their products to other retailers in other regions. Therefore, HM needs to establish and maintain sustainability in its supply chain if it intends to launch the new store successfully.
The threat of substitutes is high and is likely to increase further in the future due to the increased liberalisation within the EU and the existence of EFTA due to the high number of competitors operating in the market. Besides, consumers have a wide variety of goods from which to buy. For instance, Zara offers almost similar products at competitive prices. Therefore, the business needs to exploit new markets within the country or adopt other competitive strategies to beat the substitutes.
Demand Supply Scheme
The demand and supply of the luxury fashion apparel in the Portuguese market are very volatile due to the constantly changing consumer tastes and preferences. The demand for such products is greatly driven by consumer emotions (H & M Group, 2017, p66). As such, any alteration of the country’s geopolitical and macroeconomic events may significantly affect the demand levels. The supply side of the market is pulled by the demand side since the business’ supplies must always match the demand. Overall, the demand-supply correlation for the Portuguese fashion market is highly determined by the geopolitical and macroeconomic factors.
The Portuguese apparel market is an ideal opportunity for the launch of a new store in Corroios by HM. The justification for the business lies in the positive analysis derived from the PESTLE and Porter’s five forces analyses on the business environment as well as its demand-supply scheme. It is prudent for the business management to launch the new store with the most appropriate strategies to mitigate the identified threats and any other unforeseen challenges that may emerge.
Bobenič-Hintošová, A., 2016. Does Quality Of Business Environment Influence Foreign Direct Investment Inflows? A Case of Central European Countries. Central European Journal of Management, 3(1), pp.5-11.
Castro, C. and Nunes, P., 2013. Does corruption inhibit foreign direct investment? Revista Política, 51(1), pp.89 – 103.
E & Y, 2018. The perception of Portugal leading FDI in Europe: recent hype or lasting trend?. EY’s Attractiveness Survey Portugal June 2018. [online] E & Y, pp.1 – 48. Available at: https://www.ey.com/Publication/vwLUAssets/EY-attractiveness-survey-portugal/$FILE/EY-attractiveness-survey-portugal.pdf [Accessed 24 Nov. 2018].
Epaphra, M. and massawe, J., 2017. The Effect of Corruption on Foreign Direct Investment: A Panel Data Study. Turkish Economic Review, 4(1), pp.19 – 40.
Export Entreprises SA, 2018. Foreign investment in Portugal – Santandertrade.com. [online] En.portal.santandertrade.com. Available at: https://en.portal.santandertrade.com/establish-overseas/portugal/foreign-investment [Accessed 24 Nov. 2018].
H & M Group, 2017. H & M Annual Report. H& M Group. [online]. Available at: http://about.hm.com/content/dam/hmgroup/groupsite/documents/masterlanguage/Annual%20Report/Annual%20Report%202017.pdf [Accessed 24 November 2018].
H & M Group, 2018. Sustainability Summary 2017. H& M Group [online]. Available at: http://about.hm.com/en/sustainability/sustainability-summary2017.html [Accessed 24 Nov. 2018].
H& M Group, 2002. H&M to open stores in Portugal. H& M Group [online]. Available at: http://about.hm.com/en/media/news/244563.html [Accessed 24 Nov. 2018].
Manish Institute of Management, 2010. Global Country Report On Portugal. Global Country Report. pp.136 – 150.
Moreira, S., Vasconcelos, L. and Silva Santos, C., 2017. Sustainability of green jobs in Portugal: a methodological approach using occupational health indicators. Journal of Occupational Health, 59(5), pp.374-384.
Zhang, H., 2012. How Do Business Regulations Affect Foreign Direct Investment? Transnational Corporations Review, 4(2), pp.97-119.
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