JOHN LEWIS EXPANSION TO SAUDI ARABIA
Founded in the year 1864 in
Oxford London, John Lewis is a chain of 48 departmental stores across the U.K
that are owned and operated by the 88,900 members of the John Lewis Partnership. Over the years John Lewis has grown to become
one of the U.K's leading upmarket departmental stores with outlets in Wales,
Scotland, and England.
It also operates 12 flexible
formats and at home stores in York and Exeter.
The success of the store is largely due to its expansion strategy which has
enabled it to dominate the U.K retail sector. In order to continue its effect
and protect itself from the effects of the Brexit, the company has embarked on
an expansion strategy into the international markets and seeks to venture into
the Saudi Arabian retail sector.
Saudi Arabia is the second
largest state in the Arab world it has a population of 28.7 million people of
which 20 million are Saudi nationals, and the remaining 8 million people are
foreigners. The country has a nominal GDP of $653.219 billion
and a per capita income of $20,812.
The Saudi government decision to
ease restrictions on foreign direct investment in the country has lead to a
boom in the retail sector as a significant percentage of the population has the
disposable income to keep spending amid the decline in oil prices. This makes Saudi Arabia the best country for John Lewis to expand to as
the retail sector is just beginning to develop.
As indicated above, the Brexit decision that
was reached by the U.K has had tremendous effects on the U.K economy. The value of the pound has dropped to a thirty year low with
major firms like John Lewis and Easy jet reporting that the slump in the
sterling pound has increased their operational costs.
The country has also lost its
AAA credit rating, and this implies that government borrowing cost will be much
higher. In order for John Lewis to mitigate the
effects of the Brexit decision on its operations, the company has decided to
expand into other international markets that offer a promising outlook.
SWOT Analysis
Strength
One key attribute that will enable John Lewis
to excel in its expansion into Saudi Arabia is its strong brand image. The firm
has managed to successfully build a strong brand image for itself, and in 2008
its Oxford store was awarded a Royal Warrant from the Queen.
The firm's brand image has made
it extremely popular among U.K citizens, and thus it will be easy for it to win
over the 26,000 U.K expatriates residing in Saudi Arabia. This will help the company minimize its marketing cost as it already has
a significant expatriate population in Saudi Arabia that is familiar with their
services. The large expatriate base will also provide the firm with a steady
stream of customers while it seeks to stabilize itself in the Saudi retail
market.
Strength for the company is in the
fact that since 2001, the company’s profits have been growing steady and the
firm has managed to develop a strong cash position for itself after a decade of
enormous financial growth. This is very important for the
company’s expansion program as it ensures that the company has all the
resources that it would need to effectively venture into the Saudi Arabian
retail market.
Financial positions play a very significant
role in the international expansion of companies as it helps the company to be
able to effectively promote themselves and their products in a foreign country.
It also enables corporations to set effective operational structures.
John Lewis also has a very strong
online presence with a well developed online retail platform that even provides
international deliveries. The experience that the John Lewis
has acquired through its online presence will significantly aid it in its
expansion into the Saudi Arabian market as online retailing in Saudi Arabia is
currently booming.
The rapid growth of internet
retailing in the country is fueled by the increasing rate of internet
penetration which as at 2015 stood at 72% of the entire population. Internet sales in the country are expected to increase further with the
increase in the population and improvement in methods of online payment in the
country. The company also offers an extensive product range and
carries a diverse range of fashion brands that the client can choose from.
This is extremely beneficial for the company
as Saudi Arabia is regarded as one of the major consumers of high-end products. This implies that the company will have a strong market for most of its
upmarket consumer products therefore resulting in an increase in its
sales.
The last attribute that will enable the
company to effectively venture into the Saudi Arabian market is the fact that
the company has a highly competent management team which has received numerous
praises for revising the company’s fortunes during the last decade. The knowledge
and expertise held by the management team will enable the company to
effectively maneuver through any challenges that it may face in its expansion
project.
Weaknesses
The major weakness that is facing the John
Lewis is the lack of any international business experience. Ever since its
inception John Lewis has only operated in the U.K and most of the problems it
has faced are problems related to the domestic market. The
firm has no experience on how to manage and run an international corporation
and this will significantly inhibit its ability to perform effectively once it
has expanded into Saudi Arabia.
In order to mitigate the effects
that this weakness may have on the company, it is recommended that the company
recruits the services of a manager who has experience in managing international
businesses.
Another major weakness facing John Lewis is
the lack of any competitive advantage over its competitors. This means that the
company has no unique selling point over its competitors and will have to rely
heavily on the consumer's decision to either buy from it or not. This is also a
very significant weakness for John Lewis because its competitors in Saudi
Arabia will have a competitive advantage over the firm in the year being local
brands and hence shoppers will identify more with them than they do with John
Lewis.
After the Brexit vote, the price/earnings
ratio of the firm reduced to 9.4. This is lower than
that of its competitors and an indicator that investors are losing confidence
in the company. This implies that investors in the company may be unwilling to
fully support the expansion program.
The Brexit vote has also led to an
increase in the company’s operational cost. This
resulted in a decline in its profit margins and hence the firm may not be able
to effectively fund the expansion project into Saudi Arabia.
In order to survive in the harsh
economic conditions that are currently in the U.K, the company has been forced
to start cutting its prices so as to match those offered by the competition and
drive consumers into the department stores. This is a major weakness for the
firm as it may devalue the brand.
Opportunities
The expansion into Saudi Arabia is a
major opportunity for John Lewis as it presents it with the opportunity of
acquiring a new clientele base and hence increasing its profit margin. This
will be a major opportunity for the firm to increase its products as a study
into the consumer market in Saudi Arabia indicate that consumers in the country
already have an affinity with international brands hence it will not be
difficult for the firm to sell its products in the country.
Another significant opportunity for the firm
in the expansion process is the fact that internet penetration in Saudi Arabia
is drastically increasing and this has lead to an increase in online retailing. The company, therefore, has the opportunity to utilize its years
of experiencing in online retailing in the U.K and dominate Saudi Arabia’s
online retailing sector. Also, the margins associated with online retailing in
Saudi Arabia are higher as seen by the extensive growth of Amazon in the Saudi
online retailing sector.
Another opportunity for John Lewis lies in the
purchasing power of Saudi citizens. Saudi Arabia is among the world’s
wealthiest nations, and its citizens have a lot of disposable income to spend.
This implies that the company has very big opportunities of making significant
sales while operating in Saudi Arabia than in the U.K.
Another opportunity for John
Lewis is in the adoption of healthy lifestyles by a significant percentage of
Saudi Arabia citizens. This provides the firm with an opportunity to start
selling sports gear and healthy foods. This new category of products will
distinguish it from its competitors and serve to significantly increase its
sales in the market.
The new legislation’s regulating foreign
direct investment in Saudi Arabia also provide the company with the opportunity
of effectively setting up an operation in the country and competing with the
local firms.
Threats
The major threat facing the company in its
expansion program into Saudi Arabia is the threat of failure due to cultural
differences that exist between the U.K and Saudi Arabia. The company has no
experience on how international businesses are managed and thus it may not be
able to navigate through the cultural differences or other problems that may
emerge as a result of the expansion, thus may leading to failure. Another
threat facing the company is that after the Brexit vote, the company has been
experiencing cash flow problems.
This implies that the company may not have the
resources that it needs to effectively execute the expansion into Saudi Arabia
thus leading to a failure of the expansion project or making the expansion not
as effective as it ought to be. The relaxation of foreign direct investment in
Saudi Arabia has also opened up the market for other international retailers
with experience like Amazon and Lulu Hypermarkets.
This implies that John Lewis will be faced
with the very stiff competition when it expands into Saudi Arabia. The final
threat to the expansion is that government regulations by either the Saudi or
U.K government may impede the company’s ability to operate in the country
effectively.
PEST Analysis on
Saudi Arabia
Political
Unlike most other Arab countries, the Saudi
Arabian government has set in place business-friendly regulations aimed at
driving foreign direct investment into the country. The move has been extremely
successful with a lot of international companies expanding into the country.
The regulations have helped boost investor confidence in the country and
enhance the country’s economic growth. The regulations also make it easy for
companies like John Lewis to open and operate branches in the country.
The country’s Monarchial system of government
has enabled it to experience years of peace and prosperity, and there have been
very little incidents of political risk in the country. This
means that the funds that investors put into the country are safe from the
risks associated with political risks.
Economical
The discovery of oil in 1983 has
enabled the country to become one of the wealthiest nations in the world. The country has also embarked on campaigns to diversify its
economy which is regarded as a capitalist economy meaning that it is easy for
the organization to set up operations and compete effectively in the country
without any fear of interference from the government. The
wealth status of the country also means that the country's residents earn
enough to have the disposable income to spend thus creating a ready market for
John Lewis’s products.
Social
The country has a strong adherence to Islamic
values and the maintenance of stability socially in the context of enhanced
economic growth is consistent growths for the Country’s development plans. It also has very strong religious values.
In order for John Lewis to
survive in Saudi Arabia it has to pay attention to the countries social
practices; therefore the company should not sell any form of alcohol as most
Saudi residents will not go into an establishment that sells alcohol.
Technology
Even though the internet was
introduced in the country during the year 1999, Internet growth rate in the
country by the end of 2000 was 3750%, and the country is expected to achieve 100% full internet connection by the
year 2020. This implies that there is a huge opportunity for the
exploitation of online retailing in the country as the market is expected to
grow exponentially with increase in the level of internet penetration across
the country.
Conclusion
It is logical to point out that even though
John Lewis is likely to face a lot of challenges in its expansion program to
Saudi Arabia, the expansion is more likely to be profitable to the company
because of the vast opportunities in the Saudi market.
The economic challenges facing the
company in its home market and the expected slowdown in the U.K economy as a
result of the Brexit are all factors that point the need for the company to
expand. However, the company should first invest in the services of a manager
with experience in running an international business as this will play a
significant role in determining whether or not the company will succeed.
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