Read the articles provided below the listed questions, Neiman Makes Web Push to Lure China Shoppers and J. Crew Suits Up for Overseas, and answer the following questions: include appropriate reasons, evidence, and/or examples as support for your position.
- Briefly describe some of the general risks associated with global expansion (for any company selling a product) that are highlighted in the articles. How has the Internet changed the way companies expand into new markets and helped mitigate these risks?
- Describe the cultural issues in the Chinese market that represent challenges to online luxury retailer Neiman Marcus.
- In addition to the ideas in the article, what are some of the ways that Neiman Marcus might overcome the cultural challenges discussed in question 2?
- What are the similarities and differences in the strategies that J. Crew and Neiman Marcus are using to expand globally?
- J. Crew had a bad experience in Japan and now indicated it wants to avoid partners. What are the advantages and disadvantages of partnering with another company to enter foreign markets? Hint: See Table 4.2 on p. 104 of the textbook.
J. Crew Suits Up for Overseas
J. Crew Group Inc., once a skeptic of expanding overseas, is taking its suits and cashmere abroad. The New York-based company plans on opening stores in capital cities in Europe and Asia "soon," and beginning Thursday will start shipping online orders to 107 countries as a way of testing the market, says Chairman and Chief Executive Millard "Mickey" Drexler. The move marks a sea change for the brand and its CEO, who previously had called overseas expansion a "distraction" from domestic operations. Today, J. Crew has just one store outside of the U.S.—in Toronto. Over the past year, however, the success of U.S. competitors overseas and improvements to J. Crew's own product and sales have caused Mr. Drexler to change his opinion. "I'd always been hesitant, because I wanted to make sure it would give us the proper return on investment," Mr. Drexler said in an interview at his downtown New York office. "We still had too much to do in America with all of our businesses." J. Crew executives are currently in Asia and Europe scouting out retail space and negotiating rents, he said. Stores in Hong Kong and London will launch first and will take at least a year to open once the company finds a location. The 68-year-old CEO said he has also been traveling abroad, visiting competitors to evaluate pricing and quality. Mr. Drexler says tapping foreign markets, both online and through retail, will help spur growth. J. Crew's sales have increased in each of the past eight years, but the company still remains a relatively small player in terms of store count and revenue. In 2011, the retailer posted nearly $1.9 billion in revenue on a base of 266 retail stores and 96 outlets. Last March, Mr. Drexler took the company private with TPG Capital and Leonard Green & Partners LP. J. Crew's move overseas also comes amid tougher competition from foreign retailers expanding in the U.S. J. Crew CEO Mickey Drexler said executives are currently in Asia and Europe scouting out retail space. Last October, Fast Retailing Co. 's Uniqlo opened a 90,000-square-foot flagship store on Manhattan's Fifth Avenue as a kickoff to broader expansion in the U.S. Uniqlo currently has just three U.S. stores, but U.S. Chief Operating Officer Yasunobu Kyogoku says the chain ultimately plans to have "hundreds of stores" here. The chain expects the U.S. to be a $10 billion market by 2020, says U.S. CEO Shin Odake. Hennes & Mauritz AB's H&M opened its first U.S. store in 2000 and has more than 200 today in 30 states. Inditex Group's Zara has 47 U.S. stores. Expanding abroad doesn't mean J. Crew no longer sees room to grow in the U.S. Unlike competitors that have saturated the U.S. market and are now subsequently closing domestic stores and downsizing real estate, J. Crew has just 225 full-line stores and 32 Madewell stores. Mr. Drexler says J. Crew could easily have 300 U.S. stores, and Madewell is still growing. "We're not finished in America at all," he said. On Thursday, J. Crew will begin shipping to more than 100 countries, a move aimed at boosting online revenue but also at helping the company decide where demand would support physical stores. Before September, the chain had only shipped to the U.S., Canada and Japan. Mr. Drexler expects it will take time for J. Crew to develop a following in some countries, but has fielded requests from foreigners for the company to open stores in their countries for years. Nearly 30% of all customer comments the company receives are questions about when it will open up in other countries, and 10% of the traffic to its website is from outside of North America, the company says. Some of the countries J. Crew will ship to, like China and Brazil, are obvious choices because of their booming middle classes. Others, less so. Earlier this week Mr. Drexler, who likes to address employees on a personal loudspeaker that broadcasts throughout the company's New York headquarters, took to the device to quiz his employees about one of the new countries on J. Crew's shipping list. "Has anyone heard of a country in the world called Reunion?" he asked. Within seconds, his personal phone line was buzzing with employees explaining it is a French island in the Indian Ocean. After four phone calls, he closed the line and made a companywide announcement to give employees the answer. "I hadn't even heard of it," he admitted after hanging up. For now, Mr. Drexler is taking his time expanding. The former Gap Inc. CEO grew Gap too big, too quickly and it became a strain on the company's balance sheet.
Failed stores in Japan—where J. Crew once had 70 locations with a partner—have also left the company cautious. Mr. Drexler closed the stores in 2008 and now leans more toward controlling the company's stores abroad rather than using a partner as a result. "I think even today it's still somewhat of a distraction, but it's a long-term investment," he says.
Neiman Makes Web Push to Lure China Shoppers
Neiman Marcus Group Inc. plans to become the latest luxury name to dive into the Chinese market. But the splash it hopes to make will be online—an unusual move for a market where high-end shoppers favor brick-and-mortar buys over the click of a mouse.
The Dallas-based retailer is paying $28 million for a stake in Chinese fashion website Glamour Sales Holding Ltd., marking its first international foray. Neiman hopes the deal will help it roll out its own site to sell luxury clothing and accessories to Chinese shoppers by the end of the year, said Chief Executive Karen Katz in an interview. Neiman didn't disclose the size of the stake.
The move is an attempt to take advantage of the booming Chinese appetite for luxury goods, but without the risk and investment of opening physical stores.
"Anyone who sells luxury has to be looking at China today," Ms. Katz said, noting that Neiman hasn't yet decided if it will sell in China under its namesake brand or its Bergdorf Goodman brand.
U.S.-based luxury retailers like Neiman Marcus have benefited from the resurgence of spending among the wealthy, who have returned to shopping en masse amid the stock market rally. During its most recent quarter, Neiman posted $1.3 billion in revenue and said its profit rose 91% to $40 million.
China is poised to become the No. 1 luxury market overall by sales by 2020, with sales of $101 billion, according to estimates from brokerage CLSA Asia-Pacific Markets. In 2010, luxury spending in Greater China, including Hong Kong and Macau, ranked third globally after the U.S. and Japan, according to research by Bain & Co.
Sales of luxury fashion and accessories to Chinese buyers at home and abroad totaled about $40 billion last year, up 33% from the year before, according to consulting firm Boston Consulting Group, which calculated the estimate based on a survey of the top five luxury brands in China and 1,000 Chinese consumers. Louis Vuitton, Chanel and Gucci—all of which Neiman Marcus carries—were the top three desired luxury brands in China in 2011, according to Bain.
Meanwhile, Chinese e-commerce is also booming. Sales from all online shopping transactions, excluding business-to-business transactions, jumped to 770 billion yuan ($122 billion) in 2011, up 68% from a year earlier, according to market research firm iResearch.
Shipping to China allows Neiman to test international waters without much risk. Neiman won't have to enter real-estate contracts or grapple with local customs. Online sales tend to be higher margin than retail sales because of fewer overhead costs.
But, so far, China's luxury market and e-commerce have had little overlap. In 2011, China's online luxury sales accounted for just 3% of Chinese luxury sales, up from 1% a year earlier, according to Boston Consulting. That compares to 12% in the U.S., where overall luxury sales totaled roughly $45 billion last year.
"Luxury purchases need to become more everyday before online can take off," said Vincent Lui, a Hong Kong-based partner at Boston Consulting.
Chinese luxury shoppers prefer to buy in stores, where they can learn about the products, feel them and then flaunt them as they walk out of store, said Ben Cavender, a senior analyst at China Market Research Group. Chinese shoppers are also fearful that the products sold online are more likely to be fakes, said Mr. Cavender.
Ms. Katz said she believes that will change. Neiman launched e-commerce in the U.S. in 1999, when few were buying, she said.
Analysts say that another challenge luxury brands face online in China is selling at full price. Most consumers head to the Web for sales and Glamour Sales itself has amassed a loyal consumer base in China, where it rolled out in 2010, with flash sales of discounted goods. Neiman will sell its goods at full price on the site, Ms. Katz said.
Under Ms. Katz's leadership, the department store, which opened its first door in 1907, has worked to become more accessible and target new shoppers at the entry level of affluence. Entering China now could help further her goal by capturing more newly affluent consumers who can grow with the company.
The Neiman's and Bergdorf Goodman names aren't well known in China, but Ms. Katz said the company will aim to educate consumers through online and event marketing.
Neiman will also give Chinese consumers access to exclusive content, including behind-the-scenes videos with industry experts and insiders, Ms. Katz said.
Rival Milan-based Yoox YOOX.MI +0.66% SpA, the first foreign company to launch luxury sales online in China in 2010, attaches radio-frequency tags on products to track the delivery and ensure that the real goods don't get swapped for fakes en route. It also sends goods with a shopping bag of the brand and a reusable, durable gift box made of sturdy cardboard with a magnetic clasp in which the customer can display the goods.
Competition for the small number of online Chinese buyers is also mounting. Earlier this month, U.K. online luxury retailer Net-a-Porter, which sells brands such as Alexander McQueen and Jimmy Choo, launched in China. Many Chinese homegrown sites, such as Wooha and ihaveu.com, have also started popping up over the past few years.
1. Any time a company from one culture takes its products to another culture for promotion, there are always risks because tastes and values often differ markedly. In addition, there is the political factor, as well. If, for instance, if the United States's relationship with another country changes significantly, the conflicts between the two countries can adversely affect American businesses located in that country. However, with Internet exchange of goods, there is no physical store needed in foreign countries, so some of the risk is mitigated because there is not the large financial investment of constructing a store and hiring people to work in it and manage it, and the political risk is also lessened.
2. Since the Chinese culture is one that is markedly different from that of the United States or Europe, for Neiman Marcus there are new challenges regarding opening a store in the East. The company must ascertain what the tastes and proclivities of the Chinese people are, what products will appeal to which socio-economic groups--in short, what will sell, and to whom it will sell.
3. Neiman Marcus can overcome these challenges by testing the market; that is, by having promotions of some of their goods and studying how well they were received. Also, using a high-profile personalities from China to assist with the promotion of their products may be a profitable venture. For instance, Li Na, a professional tennis player who is very popular in China, recently won the French Open, which is one of the Grand Slam tournaments, the four most important tennis tournaments in the world. If she would endorse products for Neiman Marcus, the company would probably have substantial sales of these products. After winning the Major tournament in France, Li Na said this about Nike, who provided her with a shirt:
“Just before the start (of the) French Open,... Nike China, they do a T-shirt for me,"....“They have (in) Chinese, `Be yourself.’ So they asked me, “Is (it) OK to wear this shirt?’ I say, `Of course. Why not?’ They only make the T shirt for 30 T shirt(s) (for) all of China. I think now they should make more.’’
Both J. Crew and Neiman Marcus realize that there is a growing middle class in China and wealth is increasing in this country. With this expanding middle class, there are aspirations to ownership of better and high-level products, sometimes as a measure of status, so there is a market for their companies.
Both J. Crew and Neiman Marcus are involved with internet marketing. As of the date of the article under question, this is printed,
On Thursday, J. Crew will begin shipping to more than 100 countries....
but as of today's date both J. Crew and Neiman-Marcus online business ships to over 100 countries.
Unlike J. Crew that is considering opening its own stores overseas in London and Hong Kong, and possibly other locations if those two are successful. Neiman Marcus is partnering with another company as it is now "paying $28 million for a stake in Chinese fashion website Glamour Sales Holding Ltd. as its first international foray." Neiman Marcus hopes the partnership will help "it roll out its own site...by the end of the year."
The CEO of J. Crew, Millard "Mickey" Drexler, does not wish to partner after having had 70 locations in Japan in partnership which closed in 2008. Mr. Drexler feels that partnering makes controlling a company's stores more difficult, as it poses potential internal problems, and is not a safe way to promote sales,
"I think even today it's [partnership] still somewhat of a distraction, but it [having overseas stores] is a long-term investment."
Another difference in sales approaches is also that Neiman Marcus is considering using its namesake brand or its Bergdorf Goodman brand rather than its company name.
5. When a foreign company partners with a company that is already established in the desired location, there is already a market established, and there is afforded the foreign partner some security. That is, if the foreign company uses the name of the original company, customers may not know of the affiliate company's investment and origin. So, if political conflicts occur with the nation to which the partner company belongs, customers will be unaware of this and should not feel any negativity toward the business. On the other hand, partnerships can be dangerous as there is the opportunity for theft of company secrets, mistrust, and fraud when people have different loyalties.
I am working to put my paper together and I'm looking at your answer to the first question and trying to see where in the articles you see a relationship to the political market. Can you please clarify?
The fact that a company is "skeptical about going overseas" implies that it is concerned about foreign culture being interested or being available for the company's product. This includes concern about the political milieu of a country. For instance, if protests are staged at work sites, or if there is civil unrest, or a dictator who might decide he does not want any American companies, etc. there is, of course, the potential for a company to lose its investments.