Master thesis

:

Company and its potential expansion to Lithuanian market

Student: Jurate Zapasnikaite,
M. Sc. in EU Business and Law Student number 275203

Supervisor : Jens Vestergaard

2006 Arhus

Table of content
1. Abstract .......................................................................................................................................3 2. Introduction .................................................................................................................................4 2.1 Restrictions............................................................................................................................5 3. Clothes retail market ...................................................................................................................6 3.1 Market ...................................................................................................................................6 3.2 Leading players .....................................................................................................................7 3.3 Cross-border expansion.........................................................................................................8 4. H & M Company.......................................................................................................................10 4.1 Company profile..................................................................................................................10 4.2 H&M business geography...................................................................................................11 4.3 Shops ...................................................................................................................................12 4.4 Segments .............................................................................................................................13 4.5 Assortment ..........................................................................................................................14 4.5.1 Women .........................................................................................................................14 4.5.2 Men...............................................................................................................................15 4.5.3 Teenagers and children.................................................................................................15 4.5.4 Cosmetics .....................................................................................................................15 4.6 Main competitors.................................................................................................................16 4.7 H&M value chain ................................................................................................................16 4.7.1 Primary activities..........................................................................................................17 4.7.1.1 Buying organization ..............................................................................................17 4.7.1.2 Production supply..................................................................................................18 4.7.1.3 Outbound logistics.................................................................................................18 4.7.1.4 Marketing and sales...............................................................................................20 4.7.1.4.1 Price................................................................................................................20 4.7.1.4.2 Quality............................................................................................................20 4.7.1.4.3 Distribution.....................................................................................................20 4.7.1.4.4 Marketing .......................................................................................................21 4.7.1.5 Services .................................................................................................................22 4.7.2 Support activities..........................................................................................................23 4.7.2.1 Technology development ......................................................................................23 4.7.2.2 Human resource management ...............................................................................24 4.7.2.3 Firm’s infrastructure..............................................................................................24 4.8 Financial performance.........................................................................................................26 4.9 Expansion ............................................................................................................................27 4.9.1 Expansion strategy .......................................................................................................28 4.10 H&M SWOT .....................................................................................................................28 5. Lithuania....................................................................................................................................31 5.1 Economical and social situation overview ..........................................................................31 5.2 Major cities..........................................................................................................................34 5.3 Retail market .......................................................................................................................35 5.2.1 Vilnius retail property market ......................................................................................36 5.2.1.1 Shopping centers ...................................................................................................36 5.2.1.1 High streets............................................................................................................39 5.2.2 Rent prices....................................................................................................................40 5.2.3 Customer flows ............................................................................................................41 5.2.4 Main players in fashion retail market...........................................................................41 5.4 Lithuanian customers ..........................................................................................................44 1

5.5 Doing business in LT ..........................................................................................................47 5.6 Taxes ...................................................................................................................................48 5.7 PEST analysis......................................................................................................................48 6. H&M and Lithuania ..................................................................................................................51 6.1 Overall market situation ......................................................................................................51 6.2 Economical and social conditions comparison ...................................................................52 6.3 Retail places ........................................................................................................................55 6.4 Assumed entry model..........................................................................................................57 6.4.1 Location........................................................................................................................57 6.4.2 Shop..............................................................................................................................57 6.4.3 Assortment ...................................................................................................................58 6.4.4 Prices ............................................................................................................................59 6.4.5 Staff ..............................................................................................................................59 6.4.6 Marketing .....................................................................................................................61 6.4.7 Uncoverable company costs.........................................................................................62 6.4.7.1 Rent price ..............................................................................................................62 6.4.7.2 Direct service payments ........................................................................................62 6.4.7.3 Indirect service payments......................................................................................63 6.4.7.4 Other costs.............................................................................................................64 6.4.7.5 Total uncoverable costs.........................................................................................64 6.4.8 Turnover .......................................................................................................................65 6.4.9 Profitability calculations ..............................................................................................66 7. Conclusions ...............................................................................................................................69 8. Real facts about H&M in Lithuania ..........................................................................................71 9. Literature list .............................................................................................................................72 Appendixes....................................................................................................................................74

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1. Abstract
This master thesis is aiming to answer the question why fashion retail leader Swedish H&M operating in 24 countries, managing 1,200 shops and expanding by 10-15% every year is not in Baltic States particularly in Lithuania yet. Paper provides H&M company’s and Lithuanian market analysis and focuses on assumed company entry model. The results suggest that emerging Lithuanian market while being promising is not H&M priority at the moment. Company now concentrates on other markets with bigger potential and postpones entry into Lithuania for later. Nevertheless H&M is thinking about this market and one day it will be possible to shop at fashion retail leader stores in Lithuania as in the rest of the Europe.

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2. Introduction
In today’s global world a lot of companies are operating in many markets, chains of some of them cover almost entire world. We got used to see same brands in different countries, stay in familiar hotels, shop at known shop or eat at known restaurants. But sometimes looking for knowable brands we got disappointed as they are not in some particular country. It got interesting to analyze why fashion retail leader Swedish H&M expanding all over the Europe and America is not in Baltic States market yet. So what makes companies to enter one or another country, what motives and arguments lie behind the decision, which companies decide to expand abroad? This master thesis is aiming to answer the question – should H&M expand and invest in Lithuanian market or to postpone this for the future on not enter at all. For the answer to this question it is important to know the company, its structure, business model, development strategies etc and to analyze potential market – is it attractive for the company, does it match company expansion criteria, will it be profitable and so on. Knowing both company and the market answer regarding potential expansion can be found. Paper starts with short introduction to clothing retail market in general to understand the peculiarities of business environment H&M company is operating in. Further are presented three main parts of the thesis. First part is devoted for the H&M company’s analysis. In order to understand the decisions or be able to predict them it is important to get to know company itself. There is described company’s profile, assortment, segments company is targeting, shops and other distribution channels, look taken at the countries company is already operating in, described main competitors, financial performance and expansion strategy. More attention is given to company’s value chain. First part is finished with H&M SWOT analysis which works as the summary of company’s evaluation. Second part is devoted for Lithuania market description and analysis of required factors for later research. There is presented economical and social situation overview, analyzed retail market, retail locations and main players in fashion retail market, described Lithuanian customers and shortly presented business environment in the country. PEST analysis used to present market situation in nutshell. Third part is the merger of the first two. There is aimed to see how Lithuania match H&M’s expansion and retail activity criteria and preferences. Most of the attention is given for the assumed entry model creation analyzing location for the shop, shop itself, assortment, prices, staff, marketing, company costs, turnover and profitability.

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Findings of the thesis are presented in the conclusion part. For the objectivity purpose there are also presented few known facts about H&M real relations with Lithuania. Additional information is placed in Appendixes.

2.1 Restrictions
H&M company and Lithuanian market analysis is as deep as it is needed to answer the potential expansion possibility question. Due to peculiarity of the subject a lot of data and information used for analysis is collected from online articles, researches, news, magazines, reports and personal interviews, not from academic literature. Nevertheless sources of information were chosen in the view of objectivity and professionalism. Though in some cases there were faced obstacles obtaining needed precise data as it was paid. All data used for costs and turnover calculations are approximate and based on data from other shopping center, market reports and tendencies. All assumptions are as close to reality as possible. Findings and conclusions are made on the grounds of available and in the paper presented information. Possible different outcomes if new crucial information is presented.

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3. Clothes retail market
3.1 Market
Clothes retail market can be defined by short product life cycles, high volatility, low predictability and high impulse purchasing.1 Products in this market are often designed to capture mood of the moment, consequently the period in which it will be saleable is likely to be very short and seasonable, measured in month or even weeks. Demand for fashion products is rarely stable. It is often influenced by weather, popular for that moment films, movie and music stars, sportsmen etc. Because of the volatility of demand it is difficult to forecast total demand in a period. Besides many buying decisions by consumers for fashion products are made at the point of purchase when confronted with the product shopper is stimulated to buy it. Clothes retail market nowadays is highly competitive, fragmented and active. During last 5 years conditions in this market changed a lot – competition went up, prices decreased, fashion changes much faster. It can be said that now consumers drive clothing and fashion business, not the producers. Traditional “push” system has been replaced by the “pull” concept and all industry is consumption driven rather than production driven. While consumers appears to be in control, companies’ sales and profits continue to be lost because sometimes consumers are not interested in what they see, or they may not find what they really want, or desired garment simply do not fit. As long as there are many unsatisfied customers, there are also significant market opportunities for those able to full the gap identified by consumers. So every fashion retailer is trying to get the share and attract customers creating persistent competition. However fashion retailers are competing not only among each other, but also are facing harsh competition from other channels. Fashion retailers in general are competing with local chains, individual shops, department stores and international retail chains – each with own profile and range of products. Lately new competition pressure can be felt from grocers who are becoming important players in fashion retail market. They are developing own cloth labels for low prices all over the Europe. The main thing is that grocers now offer fashionability as well as the price. Growth of discount clothing market has potential to take sales from “standard” clothing market as price is key component in the fashion retail sector. Thus low prices from grocers, rising import from Asia and other factors intensify competition and force fashion retailers to puzzle their brain for the survival. Fashion retailers are competing for consumers’ money not only with other fashion retailers but also with the number of non-direct rivals. Dr. H. Myers in the article “Trends in European
Christopher Martin, Creating Agile Supply Chains in the Fashion Industry”, International Journal of Retail and Distribution Management , Vol 32, 2004 (with Robert Lowson & Helen Peck), p.2
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Clothing Retailing”2 quote Mintel 20053 research and states that consumers are concentrating on other areas of interest such as mobile phones, digital cameras, items to enhance home to spend their money for. Consumers also are spending more time and money for leisure activities, traveling, holidays on healthcare and wellbeing as well. Fashion retail companies have to put value into their offer to get share of spent. Companies in many ways are fighting for the customers’ money, trying to be different, recognizable, attractive and to offer good reasons for customers to visit their stores compared to competitors. Research paper by K. Brïdson and J. Evans4 suggest that brand orientation is strong competitive advantage and can help to win in good position in the market. Research results indicate that brand orientation does enhance a fashion retailer’s merchandise, trading format, customers service and customer communication advantage over its competitors. Results confirm that valuing brand and developing practices that are oriented towards building brand can distinguish fashion retailers from their competitors. So in fashion retail business when competition is huge it is crucial to create own identity attractive for customers. For the fashion retail company it is also crucial to be able to forecast newest trends. One and so far best way to do it is to reduce lead-time. Shorter lead-time means that forecasting horizon is shorter, thus the risk of mistake is lower. Company has to be fast in recognizing market opportunity and translating it into a product, placing order for suppliers and presenting product for sale. Looks like the future success will rely on ability to constantly innovate and to keep listening to consumers’ aspirations and demands, because now consumers drive fashion business.

3.2 Leading players
In Europe leading fashion retailers are Inditex with Zara, Mango and other brands, H&M and Mark & Spencer. Line-up of the leading fashion retailers in Europe is illustrated below in Figure 1. Interesting fact to mention that last year first time ever Inditex group overtook retail giant H&M. Inditex turnover was by 0.18 billion Euros more then H&M.

Dr. Hayley Myers, “Trends in European Clothing Retailing”, European Retail Digest, Issue 47, page 7 Mintel is a global supplier of consumer, media and market research. www.mintel.com 4 Kerrie Bridson, Jody Evans, “The secret to a fashion advantage is brand orientation”, International Journal of retail and distribution management, Volume 32, Number 8, 2004, pp. 403-411
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Fashion retailers by turnover
8 7 6 5 4 3 2 1 0 6,56 6,74 4,85 4,56 2,71 1,76 1,2

bn. EUR

0,93

In di te x

Sp en ce r

C& A

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Es pr it

Ne xt

H& M

Be ne t

M

ar k&

Turnover, 2005in bn. EUR

Figure 1. Fashion retailers by turnover. Source: companies’ reports.

Knowing leaders’ assortment, prices and business conduct it is clear that value-for-money and volatile fashion is key competence in fashion retailing now. Both H&M and Inditex brand Zara which are close competitors are offering fashion at the best price, every week they put new collections on the shelves inviting customers to visit shops everyday. Besides these brands are attractive in varying market conditions in many countries, their business models are successfully operating in harsh competition times and on multinational level. Their stores are all over Europe and United States.

3.3 Cross-border expansion
Fashion is a product that can be easily adapted and is on the high demand in many countries. Relatively easy brand transfer and lower risk market entry like franchising cause high level cross-border expansion of fashion retailers. Many retailers well established in the Western Europe are continually entering new Eastern Europe emerging markets. These markets have significant growth opportunities. Strong growth in retail space and thriving consumer demand for fashion and western brands are attracting fashion retail leaders to enter. When considering new market entry most fashion retailers prefer franchising or licensing as this way is least risky and with minimum capital investment. But on the other hand with lower control option then other entry modes. Some companies like H&M find the middle solution – they enter market themselves to have full control of business and brand, but do not own shops as not to lock the capital. It is interesting to see two different trends appearing across Europe in terms of format size. Part of retailers is developing large department stores while others are

Be st s

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opening small concept stores in secondary sites.5 When entering new foreign markets small format have some advantages as lower costs and more availability of sites. So every company has to consider number of factors when entering new market. To sum-up, main factors of influence are product-market factors, firm-specific factors, host market conditions and home market conditions. 6 Fashion retail business is the challenge compared with other activities as to be successful company always needs to be on top – to have eye on the market, quickly react to demand, follow the fast changing fashion, create short lead time and offer competitive price. It also has to establish adequate company structure to be able to respond to high fluctuation, short terms, uncertainty and risk which are common for this business.

Dr. Hayley Myers, “Trends in European Clothing Retailing”, European Retail Digest, Issue 47, page 10 Anne Marie Doherty, “ Factors influencing international retailers’ market entry mode strategy: qualitative evidence from the UK fashion sector”, Journal of marketing management, 2000, 16, 223-245, p.225
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4. H & M Company
4.1 Company profile
was established in 1947 in small town Västerås in Sweden by Erling Persson. At that time it only sold women’s clothing and was called Hennes, Swedish for “hers.” In 1968, E. Persson acquired the premises and inventory of a Stockholm hunting equipment store named Mauritz Widforss. Included in the inventory was a supply of men’s clothing, prompting E. Persson to expand into menswear. Accordingly, he renamed the store Hennes & Mauritz, wich later became H&M. Now H&M is giant clothes retailer with turnover (including VAT) of 7691.2 million EUR (71 885.8 million SEK)
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in 2005 and 1197 shops in 24 countries around the Europe and North

America with almost 60 years of successful experience in the market. Started from women’s clothing now H&M also offers collections for men, teenagers, children and own brand cosmetics. Company’s business concept is to provide fashion and quality at the best price. This successful combination ensured H&M strong position in the market. As it is seen in the time line, company continually pursued development in scale – extending assortment and introducing new lines and products; and in scope – constantly entering new markets, increasing number of shops and introducing new sale channels as mail orders and internet sales. Time line: 1947 opened first shop in Sweden 1964 first shop in Norway 1967 first shop in Denmark 1968-70 Company started to sell men’s and children’s clothes 1974 H&M listed on stock list 1975 introduction of own cosmetic brand 1976 started to sell teenagers’ clothes 1976 first shop in UK 1978 started to sell baby clothes 1978 first shop in Switzerland 1980 company acquired Rowells Mail Order Company 1980 first shop in Germany 1989 first shop in Netherlands 1992 introduction of BiB line – Big is Beautiful 1992 first shop in Belgium
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1994 first shop in Austria 1996 first shop in Luxemburg 1997 first shop in Finland 1998 started internet sales in Sweden, Denmark and Finland 1998 first shop in France 2000 first shops in Spain and USA 2001 started internet sales in Norway 2003 first shops in Poland, Czech Republic, Portugal and Italy 2004 first shops in Canada and Slovenia 2005 first shops in Ireland, Hungary and USA West Coast 2006 first shops opened in Dubai and Kuwait 2007 planned shop opening in Slovakia

Data from H&M Annual Report 2005

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It is clear that company all the time was strengthening its positions by market penetration and market development as well as product development. Company is establishing itself in many markets, serving increasing part of each chosen segment.

4.2 H&M business geography
At the moment H&M is operating in 24 countries across Europe, Middle East and North America. List of the countries and markets’ visual illustration are represented bellow. H&M markets*:
Sweden Norway Denmark United Kingdom Switzerland Germany Netherlands Belgium Austria Luxemburg Finland France Spain USA Poland Czech Rep. Portugal Italy Canada Slovenia Ireland Hungary Dubai Kuwait
* by the time of entry H&M markets

H&M markets. Plus USA and Canada; Lined areas are Greece, Dubai and Kuwait – expansion markets.

H&M constantly was entering new markets. First foreign market H&M entered in 1964 was neighbour Norway and now after more then half of century company is operating in 24 countries and planning to enter new. In the beginning company was entering neighbour markets – Norway and Denmark. These markets were close, familiar and similar to their home market so investment risk was low. Later company started to choose countries not by geographical criteria but economical. The decision to enter UK and Switzerland was due to strong and profitable market situation there. But nevertheless expansion tendency was from geographically closest to farthest markets – Germany, 11

Netherlands, Belgium and others. In year 2000 H&M decided to make big step and entered USA market, followed by entry to Canada in 2004. These two markets have the biggest growth potential. Later favorable changes in European economy made it economically possible to enter countries such as Spain, Czech Republic, Portugal, Slovenia, Poland and Hungary. Some of them became attractive for the company after joining the Europe Union. Germany is H&M’s biggest – 288 shops and most profitable – turnover 2,107.34 million EUR market. Then is home country Sweden with 124 shops and 667.34 million EUR turnover and UK with 102 shops and 661.84 million EUR turnover. Smallest are new markets where business just started – Slovenia, Ireland and Hungary. The newest entry was made very recently to Dubai and Kuwait. The new H&M stores in the Middle East are being established through a franchise agreement with one of the Middle East’s leading retailers, M.H. Alshaya. By doing this, H&M is able to bring its fashions to a part of the world where it would not otherwise be possible to establish a presence, using the current H&M wholly-owned subsidiary model. In the markets where company is operating number of years its strategy is to spread out its distribution channels as much as possible by establishing concept stores in prime locations as well as secondary cities and introducing online shopping. In the markets where expansion opportunity is limited H&M is developing existing business. In the new markets company is continuing to grow and to use each market’s potentials. Each country has individual business environment and different situation in clothing retail sector. In every country H&M is adjusting business strategy, but everywhere its aim is to be well established and equally spread out within country, be attractive and reachable for as many customers as possible and be profitable. The detailed data table in Appendix 1 illustrates expansion development, present business performance and future trends in all current H&M markets.

4.3 Shops
At the end of year 2005 there were 1193 H&M shops. This year already was opened 4 shops in new markets – Dubai and Kuwait. H&M is fast reaching 1,200 number of branches. In the year 2005 145 shops were opened and 20 closed due to relocations. Very few shops are closed regarding unprofitable activities as company pursue very careful market and location analysis to make the decision. All stores are located in the best business locations in high streets or shopping centers. Company do not own, but lease all retail stores and do not rely on franchising, joint ventures or similar forms of ownership. Exception was made to enter Middle East market when franchising was the only way to do so. 12

The range mix for every store is adapted depending on store location, size and customer flow in the area. Majority of H&M shops are full-range and offer clothes and accessories for women, men, teens, children and cosmetics. Others are concept shops aimed at specific target groups. They offering exclusively womenswear, menswear, childrenswear or teenagers fashion. Usually they are much smaller then full-range shops about 200-700 square meters. Concept shops are company’s way to continuing growth in mature markets and in big cities as there is easier to find smaller premises in prime locations and in this way to make company more visible for the customers. Concept stores are the supplement for full-range stores. There are also H&M Beauty shops that sell only cosmetics, underwear and accessories. All shops reflect the goal which is to make it easy and inspiring to shop at H&M. Stores are designed to create comfortable and inspiring atmosphere where things are easy to find and product display is handy. There are many inspirations for customers around and ideas for their own personal mix and match.

4.4 Segments
H&M target is mostly people between 18 and 45 (as this group makes purchase decisions for younger segments as well) with middle income who are looking for fashion clothes. That is reflected in company’s business concept – fashion and quality for the best price. H&M segments are: Women 18 – 45 Trendy, sporty, classic Men 18-45 Trendy, sporty, classic Teenagers – girls and boys – 15-17 years Youngsters 9-14 years Children 18 months-8 years Babies 0-18 month Women at age 18 to 45 are the largest segment. H&M present collections for classic, sporty and trendy women, also presenting lines for mother-to-be niche and plus-size ladies. Company covers very wide ranges of concepts, though many different style women are visit H&M stores. High variety is one of the factors for sales growth. The other big segment is men age from 18 to 45. H&M is also targeting trendy, sporty and classic men. This covers almost everyone from the student to the business person. Besides lately company introduced high quality tailored suit line with matching shirts. Teenagers and children segments are divided by the age from 0 months to 17 years. Collections are for both girls and boys from very basic everyday clothes to party outfits constantly introducing more fashion trends with growing age. Lately was separated 9-14 years old children group as they are more fashion conscious then other children. It was called H&M Young. 13

At H&M people of different ages and different needs can find offers for their individual style.

4.5 Assortment
H&M presents a range of clothes and accessories for women, men, teenagers and children. As well own cosmetics brand. All product composition can be illustrated as a triangle (Figure 2) with the latest fashion on top meaning that it is sold in small amount. This category confirm H&M image as fashion company and has big potential for future growth. In the middle of the triangle would be group called current fashion. Under this group come items sold for particular season. At the bottom on the triangle is the largest in amount group called fashion base. These items are most demanded thus always available in every store. Company places great effort to identify most demanded product in this group.
LATEST FASHION: The trendiest clothes sold in smaller quantities in big cities CURRENT FASHION: Items for particular season FASHION BASIC: Extended product range with updated classics and fashion basics that sell in large volume. Always available. Have the highest demand. Figure 2. H&M product composition

4.5.1 Women
H&M offers five different concepts for women of all ages and life style. Range goes from fashion classics to higher fashion. There are clothes for sporty women, classic women and trendy women. H&M also offers following lines: • • • • • L.O.G.G. line is updated classics with emphasis on durability, quality and function. L.O.G.G Sport designed for active life style women and offers modern and functional sport BiB (big is beautiful) line offers a range of plus-size fashion from basics to high fashion. Mama line is clothes for mother-to-be women who want to dress fashionably during their &denim is trendy jeans collection. 14

clothes.

pregnancy.

Each concept is complemented with matching accessories such as jewelry, sunglasses, belts, bags, scarves, hats, socks, pantyhose, swimwear, sleepwear and underwear – everything from basics to exclusive.

4.5.2 Men
Broad range from fashion classics to trendy clothes is offered to men as well. The range covers different needs and tastes regarding fashion, function and price. Last year was introduced new high quality tailored garment line for men. It consists mainly of suites with matching shirts, ties and knitwear. Collection is sold in selected stores. H&M also offers: • • • L.O.G.G. line is updated classics with emphasis durability, quality and function. L.O.G.G. Sport is for active life style men and offers modern and functional clothes. &denim is trendy jeans collection.

There are also offered matching accessories to complete each concept – underwear, sleepwear, swimwear, sun glasses, belts, socks etc.

4.5.3 Teenagers and children
Department for teenagers is called DIVIDED and offers young look fashion for girls and boys from everyday to party clothes. The range covers &denim – trendy jeans collection, streetinspired fashion, evening wear and accessories. Children’s range is divided into baby wear collection for the smallest 0-18 months, children wear collections is for youngsters from 18 months to 8 ears old and H&M Young is collections for 9- 14 years olds who are more fashion conscious then younger children. H&M Young is introduced in spring 2006. L.O.G.G. offers leisure wear and complements the range with socks, underwear, sleepwear, swimwear and matching accessories. All clothes for children are as fashionable as they are practical, safe, hard-wearing, functional and comfortable.

4.5.4 Cosmetics
H&M offers wide range of make-up, body care and hair care products, also matching accessories such as brushes and make-up bags. Range is constantly renewed with new products that reflect latest trends.

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H&M for every season presents new collections that are the creative fashion results of attentive look and analysis of customers demands. By offering both basic garments, as well as clothes that reflect the very latest trends, H&M makes it easy for its customers to dress their individual style.

4.6 Main competitors
Fashion retail sector is fragmented. In every individual market H&M faces competition in the form of local chains, individual shops, department stores and international retail chains – each with own profile and range of products. But in almost every market H&M is competing with following international retailers – Inditex group brands: ZARA, Mango, Bershka, Pull and Bear, Massimo Dutti etc., C&A, Mexx, Bestseller brands: Vero Moda, Only, Vila, Jack&Jones etc. and with the number of local companies that are offering fashionable good for low prices. As is stated in the Annual Report 2005, H&M monitors the actions of competitors, particularly when it comes to prices. But above all they concentrate on own offering. H&M’s ambition is to be the most attractive alternative for the customers at every location. By the concept “fashion and quality for the best price” the closest competitor for H&M is international fashion retailer ZARA.

4.7 H&M value chain
To better understand the activities through which a company develops a competitive advantage and creates value, it is useful to separate the business system into a series of value-generating activities referred as to value-chain. It comprises of two groups of activities common for a wide range of firms – primary activities are inbound logistic, operations, outbound logistic, marketing and sales, and service; primary activities are supported by firm infrastructure, human resource management , technology development and procurement. The goals of these activities are to offer the customer a level of value that exceeds the cost of the activities, thereby resulting in a profit margin. The company’s profit depends on its effectiveness in performing these activities efficiently. It is in these activities that company has the opportunity to generate superior value. By defining and better understanding core competencies, company can achieve different advantages. For example cost advantage can be achieved by understanding costs and their generation within value chain. Company can decide which activities to perform itself and which to outsource to specialists and gain in costs. Differentiation advantage can be achieved if company focus on activities associated with core competencies and capabilities in order to perform them better then competitors. 16

In fashion retail business it is crucial to create efficient value chain to be effective in time, competitive in price and quickly react to market demand changes. H&M is company having very well established and strong position in ready-to-wear cloth market. To see and examine company’s competitive advantages and to see which activities build the value, company’s value chain is created. FIRM INFRASTRUCTURE PEOPLE ( HRM) TECHNOLOGY DEVELOPMENT
BUYING ORGANIZATION PROCUREMENT PRODUCTION OFFICES LOGISTICS MARKETING AND SALES SERVICE ADDED VALUE

700 INDEPENDENT SUPPLIERS
Figure 3. H&M value chain.

4.7.1 Primary activities
Within H&M value chain primary activities are buying organization that is divided to procurement and production sections, logistics, marketing and sales and services. 4.7.1.1 Buying organization H&M value chain buying organization is placed as primary activity because it has great importance within the company as it does not produce any goods itself. Buying organization is divided into two parts – buying section (procurement) which focuses on customer fashion and range composition; and production section which is responsible for production offices. Buying function is entrusted to buying and design department. Department is situated in head office in Stockholm. There is the beginning of all ideas and birthplaces for all collections. Department’s task is to find balance between main business concept components – fashion, quality and best price. Each concept – women, men, teenagers and children – has own team of designers, buyers, assistants, pattern makers and budget controllers to get the best possible result. For these people are the most important to understand the customers, to know what they are looking for. It is 17

crucial for business to create trendy, catchy, up to fashion and demanded collections. So far H&M does it perfectly and few times a year offers collections that meet different needs, styles and preferences of their customers. H&M come up with exclusive ideas to cooperate with famous designers - Karl Lagerfeld, Stella McCartney and lately with Viktor & Rolf – and to offer an exciting shopping opportunity for style conscious shoppers who appreciate H&M’s approach to fashion and quality at the best price. Each of them created set of the items that were sold at H&M prices. This was clever step to attract customers, increase sales and to consolidate company’s image as fashion company. 4.7.1.2 Production supply H&M do not own any manufacturing operations. Instead of that company has 22 production offices which are responsible for contacts with about 700 independent suppliers that manufacture goods for the company. In clothes retail business it is not necessary to own manufacturing plants to get best business results. It is more efficient, cost and time saving to do what company does best and then to cooperate with other businesses in buying products or services. Manufacturing is important, but not the crucial part of the H&M value chain. So it can be entrusted for independent suppliers. Besides H&M created the system of rules and practices which allow controlling the results and ensuring the best quality of the goods. 22 production offices situated in Europe (9), Asia (11), Africa (1) and Central America (1) are responsible for maintaining the contact with suppliers, ensuring that orders are places with the right manufacture, checking that production is taking place under right working conditions and ensuring the balance between lead time, price and quality. Where orders are placed depends on many factors, including price, transport time, import regulations and quality aspects. To shorten lead time the responsibility of sample garments examination and testing were transferred to production offices as well. Therefore communication and sharing of information between production offices and suppliers plays very important role. Communication within buying organization is crucial as well to insure short production time. 4.7.1.3 Outbound logistics In fashion business is it crucial to have leads times as short as possible. At present lead times at H&M takes from three weeks to six month depending on garment. Longer lead times are for basic products, but company is aiming to have high-fashion items in stores in two to three weeks after pattern was created by designer.

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H&M is aiming to cut lead times further by continuing to develop advanced planning. The later an order can be placed, the better the hit rate and the grater flexibility. This allows stores to be restored quickly during season with best-selling products. Company established effective buying process and new goods arrive to shops everyday. This allows H&M constantly renew range in the shops and make customers more frequent visit stores. All this would not be reached without efficient logistic system. Within H&M logistics is crucial part of business as it ensures fast and consistent flows. There can be distinguished two kinds of flows in the company – flow of goods between production unit to the stores and information (feedback) flow from the stores to buying department. When having almost 1200 stores in 24 countries and selling wide range of concepts then the right goods in the right quantity to the right store in the right country at the right time is of the huge importance and requires well established distribution system. As logistics is important part of value chain H&M has full control over each link of distribution chain being both importer and retailer. Just shipping services are bought form transport firms.
Store Store Store

Buying departmen

Sales country
(Distribution center)

Manufacture

Transit warehouse
Hamburg, Germany
Figure 4. H&M distribution system. Size of arrows illustrates the flow amounts. Dashed arrows illustrate feedback.

As it is illustrated in distribution schema above in Figure 4 part of the goods from the production countries are sent directly to the sales countries. In every country with the exception of new markets there is company owned distribution centers. In these centers goods are checked before being transported to the stores and stores’ local warehouses. The other part of goods from production countries go to company’s transit warehouse located in Hamburg, Germany and only from there reaches sales countries. Feedback from stores to buying department ensures that demanded goods are ordered and delivered on time. It also helps to create customer database and understand their preferences.

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4.7.1.4 Marketing and sales 4.7.1.4.1 Price Part of the H&M successful business concept is to offer best price. This is one of company’s competitive advantages. Price reduction can be reached in several stages. First of all company has few middlemen – most of operations are performed by the company. In this way extra cost that usually are added by intermediates are avoided. Second, H&M is big company having huge sale volumes thus cost savings are received from buying in large quantities. Third, company collaborate with number of suppliers in different markets, therefore is able to use advantage of each market and place orders where they can be done at the lowest costs. Furthermore during almost 60 years in the business, company obtained broad and in-depth knowledge of designs, fashion and the textile industry. This knowledge and experience is another competitive advantage of the company when it comes to the cost saving. H&M in general is cost-conscious at every stage and can always offer the best price for its customers. 4.7.1.4.2 Quality Company pays great emphasis in the quality of the goods. These days it is not enough to offer low price especially for repeated purchase goods. Customers are now getting harder to please thus the quality important issue. At H&M quality comes in the combination with fashion and best price. So it is not always the best quality. It is somewhat the most optimal solution. Some customers say that H&M goods do not last long and after few washes looses colour and shape. Maybe it is true. But on the other hand clothes have short product life circle and fashion changes so fast. So if the product looks good as long as it is fashionable there is no problem at all. Company is much concerned about image and customer satisfaction when it comes to the quality. Time after time when it is find out that some particular product does not match quality requirements there is announced product recall with full refund. First of all these things should not be happening because proper product testing has to be performed before production, but looks like in order to shorten lead time to minimum such mistakes happen. Second it is better to correct mistakes later and to show concern then never to do so. For H&M quality is not only in the products itself, but also that they are manufactured with the least possible environmental impact and under fair labour practices. 4.7.1.4.3 Distribution H&M performs sales through three channels – retail stores, mail orders and internet. The biggest part of sales goes through retail stores. That is the primary and most important communication 20

channel for H&M. Company does not own any stores, but instead of this it lease premises. In this way capital is not tided up and company exercise higher level of flexibility. It can easier change location of store if there emerge a need for that. Stores are always located in the best business areas in the cities or in shopping centers as these areas attract the biggest customer flows. Full range stores are supplemented by concept stores that are aimed for specific target group. H&M aim is to create attracting and inspiring environment, where customers feel like at home, where things are easy to find and where guidance and inspiration for customers are provided. In this way customers feel comfortable at shops, enjoy shopping and will be willing to come back again. This is one of the means to build customer brand loyalty. H&M in 1980 acquired Rowells Mail Order Company. Now H&M Rowells is responsible for sales by mail in Sweden, Norway, Denmark and Finland. Two major catalogs are presented each year; they are supplemented by few smaller more focused seasonal catalogs. The range of offering represents the same business concept, but due to difference in sale patterns they are more focused, adapted for this sale channel. Since 1998 H&M is offering to their customers to buy clothes online. Online shop offers goods for women, men, children and cosmetics. At the moment sales online are available in Sweden, Norway, Denmark and Finland. This sale channel proves to be successful one and company is expanding it to other countries. Netherlands will be the first country out of Scandinavia to offer online sales for autumn this year. H&M is trying to make online shopping as real as possible. It is really exiting to visit Dressing room (at www.hm.com). There customers can create their own body shape models and to try on clothes. There it is possible to zoom and even to rotate the model and to see how piece of clothe looks from each side. This definitely makes online shopping more exiting. Catalog and online sales will never exceed retail store sales, simply of the nature of the product. Clothes have to be touched, tried and experienced. There can be one impression in the picture and totally different in reality. In pictures things always look better. So online and catalog offers will always stay limited and there will always be limited number of people who will buy online. As shopping clothes for many (especially women) is not only the process of acquiring the goods, but also social and exiting event. 4.7.1.4.4 Marketing All of H&M communication is aimed at long-term brand building. In always company tries to increase consumer confidence in H&M brand. Their inside and outside communication is characterized by open attitude, clear message, objectivity, approachability and alertness. 21

H&M communicates through media, print advertising, outdoor advertising, TV commercials and Internet, but most important is retail stores and employees. The face-to-face communication is the most effective. It is important to make people interested and to come to stores, but it is more important to make people satisfied, serve their needs and make then come back. Clothes are often purchased thus customer satisfaction and brand loyalty is crucial in fashion business. H&M advertisements are created centrally at head office in Stockholm cooperating with independent professionals and each advertisement serves as informative and inspiring invitation to visit retail stores. The central message of any campaign is to show collections to the public. The advertisements are more or less identical in all markets, but media mix is adapted to local needs and conditions. H&M is very much concerned about positive, healthy and their main values reflecting brand image. This was very well illustrated in situation when the contract with top model Kate Moss was canceled after drug scandal when she was recorded using cocaine. It is very much understandable as company was not willing to be associated with this kind of life style. Company also employs Public Relations activities to strengthen and clarify brand image. As company is stating – it is cost-effective way to reach different target groups and to communicate what H&M stands for and what they offer for customers. Company is also constantly interacting with business and fashion media. Internet for H&M is not only the sales channel it is also good way of communication. On company’s web site customers, investors, press and everyone interested can find main information about company, reports, newest collections, promotions and events, store locator, H&M Magazine and things to download. Everyone can get the shots of latest collections as wallpaper or screensaver, as well collection film and music. 4.7.1.5 Services In company’s value chain services are activities that maintain and enhance the product’s value. In H&M value chain such services are customer services: Size charts – this provides information about right size. If person buys right size garment it will suit better, person will be more satisfied and this will add value to the product. Garment care – company is providing detailed explanation how to look after the clothes purchased at H&M. Pursuance of instruction will ensure longer usage of garment. Exchange and refunds – customers can exchange or return goods under certain conditions to the shop. This option gives flexibility for the customer to get better deal, 22

especially in exchange case. Customers are more satisfied; feel not bonded to the purchase and will be willing to shop more. H&M could gain from implementing mending service as some of its competitors do (e.g. Zara). This would be direct product value enhance. Customers are willing to buy clothes that suit them the best, but everyone is different shape and standard sizes do not suit for all. So mending services performed at the store would add the value to the garment and in this way would attract more customers as they would know that at H&M can get clothes then suit them best.

4.7.2 Support activities
In H&M value chain support activities are technology development, human resource management and firm’s infrastructure. 4.7.2.1 Technology development Technology development supports company’s value chain activities and thus promotes value creation. Within H&M technology development takes place in almost every department aiming to sustain competitive advantages. Product development and customer knowledge. Company use latest design software and color-matching programs which enables to come up with new and original ideas, to create attractive models and to offer customers different fashion solutions. H&M constantly collect information about customers and try understanding them as good as possible. Knowing who their customers are and what they look for allows creating better offers and concepts. Company pursuer continues product development by introducing new solutions, new lines and new concepts such as &denim concept or high quality tailored suits for men. Distribution. H&M is constantly improving distribution system to be faster, more efficient and to be able to respond to the market as soon as possible. Company made few changes in structure and responsibilities delegation in order to increase flexibility and enable advanced planning. Consequently this will make lead time shorter which is huge competitive advantage to be able to respond quickly. Functions. There is constant development of IT to improve logistics, internal communication and online sales. Constant technology development in all levels ensures that company is leading in the market as newest, most productive, rational and cost efficient means are implemented.

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4.7.2.2 Human resource management At the end of year 2005 there were over 50,000 people working for H&M in this number 34,614 are full-time employees8. Company pays great attention to its human resources as they are primary connection with the customers. From very first days of existence H&M has strong corporate culture. This strong culture is of great value and is a contributory factor to company’s success over the years. The fundamental values are common sense, own initiative, respect. Company gives an opportunity for employees to make own decisions and initiative within defined framework and to take responsibilities providing regular feedback on their performance. Company believes that good working environment increases creativity and job satisfaction and strongly encourages it starting from fair pay and reasonable working ours till growth and development opportunities within the company. H&M has a rule whenever it is possible to hire people internally. And if people are coming from outside the H&M then they start as sales staff later moving up within the company. This strategy ensures that employees fully understand how company is functioning, what are its goals, culture, strategies. Internal recruitment is one of the ways to attract and keep skilled staff. Besides company gives big attention on training and development of the skills that are carried within the organization. Company also pays great attention to their suppliers’ improvement. One way for that is Code of Conduct9 that each supplier has to sign. It covers such issues as providing at least the minimum wages prescribed by law, reasonable working hours and allowing freedom of association. Improvement of working conditions is investment in the future and will lead to lower staff turnover, better quality and increased productivity. There are gains not only for suppliers, but for the H&M as well. Set of fundamental and efficient company rules are always transferred when opening new shops and entering markets in order to continue successful functioning. 4.7.2.3 Firm’s infrastructure Being huge company it is not so simple to ensure effective management. The company management is centralized with head office based in Stockholm. In head office are located main functions such as buying and design, finance, accounts, expansion, human resources, marketing, communications, interior design and display, investors’ relations, IT, logistics, environment and security. Strategies, rules, decisions, ideas, concepts etc. are produced centrally and the delivered to 15 country offices and 22 production offices that are located in other countries. Almost each
8 9

H&M Annual Report 2005, p. 52 Full text H&M Code of Conduct is presented in Appendix 3.

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sales country has own office for sales and other functions management and head office’s decision implementation. Just new markets are managed from neighbour countries. Ireland in managed form UK, Italy from Switzerland, Poland from Germany, Luxemburg from Belgium (because of the size of market) and Check Republic, Slovenia and Hungary are managed from Austria. 22 production offices in Europe, Asia, Central America and Africa as it was mentioned before are responsible for contacts with independent suppliers. Production offices closely cooperate with design and buying department. This company’s structure allows ensuring that same business concept, strategies, ideas and companies spirit is transferred and implemented in all markets and all shops. In Figure 5 bellow is illustrated H&M corporate governance structure.

Figure 5. H&M corporate governance structure. Source H&M Annual Report 2005

Annual general meeting is held once a year to conclude results, preset report, discuss and confirm future of the company, appoint election committee and auditors (every four year). Election committee consisting of five largest shareholders gives an evaluation of the Board of Directors. Boar of Directors consist of sever ordinary members selected at Annual General Meeting and two deputies. There are also two employee representatives with two deputies – in total 13 people. By the rules board shall hold five regular meeting per year in additional to statutory meetings. Board is continually informed about company’s financial development and position, organizational changes, makes decisions on the general strategy, financial investment, expansion to new markets, dividend policy, appoints Auditing committee. Board is also responsible for remunerations as there is no special remuneration committee. With the help of Auditing committee Board of Directors is responsible for the quality of company’s financial reports.

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Auditing committee’s main duties as it is stated on H&M web page10 are “to review the reporting routines and assess whether they are in line with H&M’s needs. The Committee’s task is also to ensure that accurate information is provided to management and the Board in an expeditious manner. The Auditing Committee shall also assess tax issues and proposed amendments to the accounting principles”. Committee constantly receives information and documents from all departments of the company for their decision making. Auditing issues are reported to the Board of directors. Managing Director and CEO of H&M is Rolf Eriksen appointed for this position in year 2000. Managing Director is responsible for day-to-day company operations. Responsibilities involve finances and account, human resources, establishment of new stores, communication with stakeholders such as finance markets and government agencies. Managing Director also report to the Board of Directors on all operation activities. As it is shown in the corporate governance structure CEO appoints team of senior executives and country managers. There are executive managers for finances, buying, production, expansion, accounts, HR, marketing, information, investor relations and corporate social responsibility and environment. H&M infrastructure allows efficient management and control within the company.

4.8 Financial performance
H&M is an expansive and financially strong company. The strategy is to grow whilst maintaining good profitability and control. Growth target is to increase number of stores by 1015% per year, but also to increase sales at existing stores. In the past five years company as it is presented in the five year financial summary in Table 1 bellow has increased turnover by 54 %, the number of stores has increased by 54% as well. Compared to year 1999/2000 growth is accordingly 100 % and 75%. This expansion has been entirely self financed.

10

http://www.hm.com/gb/investorrelations/corporategovernance/auditingcommittee__corporategovernenceauditingc ommittee.nhtml retrieved on April 10, 2006.

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Table 1. H&M five year financial summary

In annual report 200511 H&M is stating that its financial goal is to continue to enjoy healthy growth as well as to be ready to exploit future business opportunities. It is essential that expansion as in the past continues with the same high degree of financial strength and continued freedom to act. To be able to exploit future business opportunities and growth H&M is continuously improving profitability. Company lay that “strong profitability is mainly attributable to their low level of markdowns and to cost-efficient buying and logistics organization and well as focus on increased clarity in the buying organization and in the stores. The removal of restrictions on imports from China also had positive impact, as it resulted in lower buying costs12”.

4.9 Expansion
At the moment H&M is managing 1197 shops in 24 countries and looks like this is not the limit for the company. It has an object to increase the number of stores by 10-15 % per year.

11 12

Annual report 2005, Administration report p.40 Annual report 2005, Letter from managing director, p. 20

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Naturally, expansion may vary from year to year since it largely depends on the supply of attractive store locations. This year company entered Middle East by opening first shops in Dubai (UAE) and Kuwait. Due to local ownership restrictions company is entering region signing franchise agreement with Saudi Arabia Company MH Alshaya. Company already manages 28 retail chains in the region including such as Body Shop and Bhs. MH Alshaya will open 17 H&M stores13. There is also planned (Slovakia) and under consideration (e.g. Greece) expansion to new markets as well as development of existing markets. H&M have already signed a contract for first store in Bratislava, Slovakia, which is planned to open in spring 2007. In 2006 H&M is planning to open 150 new shops. Most of expansion according to company will take place in the USA , Spain, Germany, the UK , France and Canada. Notable new locations include Los Angeles and the Canary Islands.14

4.9.1 Expansion strategy
Company‘s expansion strategy is to continue to grow whilst maintaining good profitability. So in the new markets there is considered factors such as demographics, employment, purchasing power and purchasing behaviour. There is also performed local evaluation of shopping areas, shopping centers, neighbour stores, competitors’ location, traffic flows, accessibility by public transport. Location is everything when company is looking for the store premises – best location is company’s principle from the very foundation. As it is stated in Annual Report 200515 H&M consider and advantage to be close to the competitors, since more customers will be attracted to good commercial areas with many stores – giving company better chance to offer more customers an opportunity to get better deal. H&M aims to be the most attractive option for its customers in every town.

4.10 H&M SWOT
SWOT analysis is a tool for auditing an organization and its environment. It is used to evaluate the Strengths, Weaknesses, Opportunities, and Threats involved in a company or in a situation. Analysis provides information that is helpful in matching firm’s recourses and capabilities to the competitive environment it operates in.
13 14

www.alshaya.com retrieved on August 5, 2006 Annual report 2005, Letter of managing director, p.20 15 Annual report 2005, Markets, p.29

28

SWOT in this paper is used to summarize H&M Company’s competitive advantages, weak sides where more attempts have to be thrown, unused opportunities for future and threats that company has to be ready to face and avoid.

STRENGTHS
• • • • • • • • Company is experienced in fashion retail market Reacting to “consumption driven” concept in the fashion industry and always keeps the eye on the market. Successful combination – quality and fashion for low price. Target many segments. Present wide range of concepts for women, men, teenagers, children and own cosmetic brand. Many different style people can find items to suit their individuality. Product composition covers fashion basic, current seasonal fashion and latest trendy fashion. Create fashionable, trendy and favored by customers collections. Have strong and creative designers team who do not copy styles that have already appeared on the runaways of Paris and Milan, but pick up ideas from street trends, exhibitions, movies, magazines and trade fairs. • • Have great focus on customer and do everything to create exiting shopping. Offer goods for low price as there are very few middlemen, most operations performed by the company, avoid intermediate costs, place orders in huge quantities and can negotiate the best price. • • • • • • • • Have short lead time, short response to market demand. Have full control of distribution system which is crucial for fashion retail business. Company is importer and retailer. New goods arrive in shops everyday and customers are interested to come there often. Efficient inside communication. Centralized marketing to keep clear brand orientation. No franchise or joint venture market entry (with only one exception) to safeguard H&M concept. Focus on what they do best and where high control is needed. Company do not own any production factories, thus have tight relations with suppliers. Do not own shops and have unlocked capital.

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WEAKNESSES
• • Huge company operating in 24 countries. Has to be managed efficiently. H&M uses the same store standards, pricing strategies, and margins regardless of the location of the store to be easier to control, thought in some cases surplus value due to specific market conditions can be lost.

OPPORTUNITIES
• Wide and strong retail chain well spread out in each country. Stores in prime locations, concept stores in prime and secondary cities. Two kinds of shops allow better covering of every market and better customer reach. • • Removal of restrictions on imports from China resulted in lower buying costs. Thus some other restrictions were reinforced later. New emerging markets where company is not operating yet.

THREATS
• Weather. Goods are delivered to stores on the basis of normal weather patterns. Major deviations from normal conditions may affect sales. The effect will be greatest if there are major deviations at the beginning of a season. • • Changes of textile quotas may affect buying costs. Thus this has an impact on the entire industry and is therefore competition-neutral. H&M is affected by currency fluctuations as a result of the receivables and liabilities that arise continuously between Group companies. The introduction of the euro has reduced this exposure, but still there are countries with own currency. • Increasing competition pressure from other fashion retailers. Threat to loose leader positions and share of market. SWOT analysis show that H&M has developed many strong competitive advantages that made it leader in the fashion retail market. Few weaknesses show that company learned a lot during the time they are in business, learned from mistakes, were open for changes and took competent decisions. In every business and for every company there are opportunities to use or they emerge time after time. Threats that H&M is facing are common for fashion retail industry and for retailers operating in several markets.

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5. Lithuania

Lithuania is the largest of three Baltic States countries. With the area of 65 300 square kilometers it is larger then countries such as Belgium, Denmark, Netherlands, Switzerland, Slovenia and Slovakia. Neighbour countries are Latvia in the North, Belarus in South-East, Poland and Russia (Kaliningrad) in South-West and 100 km Baltic Sea line in the West. After reinstated independence in 1991 Lithuania went through the way of economical and political reforms, have transited from state-regulated to market-based economy. Joining NATO and EU added even more importance and opportunities for the country which is now one of the fastest growing economies in the Europe.

5.1 Economical and social situation overview
In Lithuanian in the beginning of the year 2006 population was 3.4 million, about 30 thousand less then in the beginning of 2005. Decrease of population is related to international migration especially after country joined Europe Union and natural decrease due to less birth then death.
Population, thousands
3500 3470 3440 3410 3380 3350 3320 3290 3260 3230 3200

Population by age groups
600000

3481,3

3469,1

3454,2 3435,6 3405,2

500000 400000 300000 200000 100000 0 0-4 5 - 14 15 - 24 25 - 34 35 - 44 45 - 54 55 - 69 70 +

2001

2002

2003

2004

2005

Total

Men

Women

Figure 6. Lithuanian population. Source: Lithuanian Bureau of Statistics.

Figure 7. Population by age groups in Lithuania. Source: Lithuanian Bureau of Statistics.

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Around 67% of population lives in urban areas. Lithuanian population distribution by age is illustrated in the Figure 7. The biggest age groups are 15-24 years, 35-44 and 55-69 years. The natural decrease and emigration created situation where elder and retired part of population is increasing and employable population decreasing. highest in Europe. In 2003 with the GDP growth of 10.5% country was recognized as fastest growing economy in Europe.
4 3 2 1 0 -1 -2 2001 2002 -1 2,5 2
12 10 8 6 4 2 0 2001 2002 1,7 6,4

GDP growth %

10,5 7,5

6,8

7

2,3 1,1 0,9 2003
Lithuania

2 2005

2004
EU-25

The GDP growth in Lithuania is one of the Figure 8. GDP growth in Lithuanian and EU. Source:
Lithuanian Bureau of Statistics; Eurostat.

Inflation rate %

According to Lithuanian department of Statistics in 2005 GDP at current prices was 71 084 billion Litas (20,604 billion €) and experienced growth of 7.5% compared with same period of previous year. Analysts forecast that GDP growth this year will stay at the same 7.5% growth level and next year will slow down a little to 6.5% growth. The highest input to GDP is from manufacturing industry (26.3% in total GDP growth) and trade (19.6%). After few years of deflation Lithuania experienced increase in prices in 2004 and 2005. Inflation affected prices of most consumer goods and services. The higher increase as Department of Statistics inform is seen in service prices which overtakes increase of goods prices. At forecast that this year inflation will be 3.6% and 2007 will stay at close 3.5% level.

2,9 2,1 1,9 2,1

2,7 2,3

2003 -1,3

2004

2005

Lithuania

EU-25

Figure 9. Inflation rate change in Lithuania and EU. Source: Lithuanian Bureau of Statistics; Eurostat.

Unemployment , %
20

17,4
15

12,5
10

8,3
5 0 2001

13,8 11,3 8,9

12,4 9,1 8,1

11,4 8,9 6,8

8,7 8,3 4,8

2002

2003

2004

2005

Lithuania

EU-25

Registered Unemployment in Lithuania

2005 inflation rate was 2.7%. Analysts Source: Lithuanian bureau of Statistics; Eurostat

Figure 10. Unemployment change in Lithuania and EU.

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Unemployment rate in Lithuania is constantly decreasing that show both total and registered unemployment rates and is lower then EU-25 average rate as it is illustrated in Figure 10. In 2005 registered unemployment in the country was 4,8 % while total unemployment was 8.3%. Total unemployment this year is forecasted to be 6.3% which is 2% lower then previous year and in year 2007 unemployment prognosis is 6%. Though analysts are in doubt that unemployment rate will go down further. Due to increased emigration, possibilities for the employees to choose labour force decreased significantly, and now labour market has to accept those whose age, qualifications or even gender was not acceptable for the employees. In some sectors there is even shortage of specialists.
Decreasing unemployment has direct impact on increasing consumer spending power, which creates potential demand for consumer goods in this way demand for retail as well. The average salary in Lithuania in 2005 was 374 €, 12 % more compared with 2004. Despite constant increase earnings
324
400 350 300 250 200 150 100 50 0 2002 2003 2004 2005

Average monthly gross earnings, €

339

358

394

in Lithuania are among lowest in EU. Figure 11. Average monthly gross earnings in Lithuanian. Source: Lithuanian Bureau of Statistics. Nevertheless official statistics report that Public sector wages are higher then in private sector. This shows the fact that there is certain degree of under-reported salaries in private sector as employees and employer seek to pay less taxes. According to some business surveys, wages in private sector may be about 25% higher then of those working in public sector. Besides should be noticed that official statistic is not able to capture emigrants’ money which they send to Lithuania and other non-official incomes. So in real people incomes are higher. In the long run salaries are expected to continue to grow till they reach the EU average earnings. Analysts forecast real earning increase by 10.5% this year and by 9.3% in the 2007. So salaries are growing faster then the GDP of the country. One step towards growing income was done this year. From the 1st of July income tax was reduced from 34% to 27% and till 2008 government is planning to reduce it further till 22%. Of course continuous growth of salaries is only sustainable as long as it is met by growth of productivity. Optimistic prognosis for wages increase lets to assume that consumer spending will also growth accordingly. 33

According to 2004 year data from Department of Statistics as illustrated in Figure 12 biggest part of income Lithuanians
4,5 5

Household consumption expenditure
Food and non-alcoholic beverages

1

4

4,5

Alcoholic beverages, tobacco and narcotics Clothing and footw ear Housing, w ater, electricity,gas and other fuels Furnishings, household equipment and routine maintenance of the house Health Transport

spend on food, in second place is expenditure for housing and in the third For expenses clothing for and transport.
8,8

38,6

5,3 4,2 12,2 3,7 8,2

Communication Recreation and culture Education Restaurants and hotels Miscellaneous goods and services

footwear Lithuanians spend 8,2 % of their income.

Figure 12. Household consumption expenditure. 2004 year data. Source: Lithuanian Bureau of Statistics.

So Lithuania is relatively small country experiencing fast economic growth with increasing purchasing power and low unemployment.

5.2 Major cities
Lithuanian territory is relatively evenly covered by cities and towns. Due to urban planning country avoided destiny of neighbour Latvia where 2/3 of population live in Capital Riga. Most active and economically strongest there are 4 cities in the country – capital Vilnius, second largest city Kaunas, harbor city Klaipeda and Siauliai. Vilnius. Capital and the biggest city. Its population is 542.000 citizens. Vilnius is center of culture, politics and business, and attracts the biggest part of investments. All main public and governmental institutions are located there, what makes desirable place to establish company’s main office. Vilnius has become the major engine of economical development in the country with the highest GDP per capita level and fastest growth. City is the center of business and cultural tourism. According to the Lithuanian Bureau of Statistics in 2004 1 million tourists visited Vilnius. Unemployment in August this year was 2,6%. Kaunas. It is second largest city in Lithuania with population of 380.000 citizens. Kaunas is situated in the central part if the country and is natural center of logistics and industry. It has big cargo airport, from where lately started to operate cheep flight companies Ryanair and several 34

others attracting more visitors to Kaunas. There are also located many educational institutions. Unemployment in 2006 August was 2,5 %. Klaipėda. It is harbor city by the Baltic Sea with the population of 193.000. It is the only icefree port in the Baltic. Klaipėda is large transport junction of sea, land and railway routes. Its Free Economic Zone is actively operating and attracting various investors. Unemployment in 2006 August was 2,6 %. Šiauliai. It is the fourth biggest city in Lithuania with population of 134.000 citizens. It is regional center in the north of country. There is developed production of bicycles, TV sets, communication equipment, furniture and textile. Next to town is located ex-military airport where now is dislocated NATO Airforces. Unemployment in 2006 June there was 1.5 %. Panevezys, Alytus, Utena are so called secondary cities. They are centers of regions and lately was seen increased interest of foreign investors to there areas as they are economically growing with increasing purchasing power.

5.3 Retail market
Retail trade growth is very impressive last three years and according to
20 15 10 5 0 2000

Domestic trade growth

Lithuanian Department of Statistics in 2005 turnover of retail trade enterprises, except those trading in motor vehicles and motorcycles, was 12,9 % more compared with the same period of the year 2004. The biggest increase in turnover was of enterprices trading in textiles, clothing, footwear and leather goods – 36,3%; furniture, lightning equipment, household

14,4 11,1 7,9 2,3
2001 2002 2003 2004

10,7

12,9

2005

Turnover (VAT excluded) of retail trade enterprises except those trading in motor vehicles and motorcycles, % as compared to previous period

Figure 13.Trage growth in Lithuania. Source: Lithuanian Bureau of Statistics.

electric appliances, radio, TV goods and construction materials – 29,6%.Turnover of bars, restaurants and other catering enterprises increased by 24,8% in 2005 compared with the same period of the year 2004.Turnover of clothing and footwear retailer in June 2006 increased by 32% compared with June of 2005. These turnover growths indicate increasing purchasing power of consumers.

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5.2.1 Vilnius retail property market
As this country description is intended for investment and market entry analysis, only first most attractive place – capital Vilnius being economical, political and cultural center- will be analyzed in more details. All modern retail premises can be divided into three major segments – shops in city’s high streets, super/hyper markets and shopping centers. Due to the topic of this paper super/hyper markets’ segment will not be described and analyzed. 5.2.1.1 Shopping centers Shopping centers as such in Lithuanian market exist only several years, so this segment is experiencing strong growth and development. Significant improvement of country’s economical indicators, increasing purchasing power let to assume that Lithuania, and Vilnius itself are ready to absorb much more retail area, accept strong international retailers and go up to European retail space average level. According to real estate advisors Re&Solution16 calculations net modern retail are in Lithuania in 2006 was 431,382 sq. meters and next year this number will increase by another 380,500 sq. meters as many projects all over country will be completed. Thus modern retail area per capita from 126 sq. meters this year will increase to 238 sq. meters next year. So Lithuania is reaching European level of shopping center are per capita which is over 200 sq. meters17. In general, the interest from foreign retailers is to have first shops in the capital and for local ones is to have as big as possible market share thus Vilnius is most attractive place due to higher income, bigger number of visitors etc. This makes demand for retail space to be quite strong with pre-lease and zero vacancy in the main retail streets and shopping centers. The existing modern shopping centers in Vilnius are presented in Table 2 bellow.
Name Akropolis Europa VCPU Hyper Rimi Mada Mandarinas Flagman Grand Duke Place
16

Net area, sq. m. 95 000 17,050 13,070 16 000 12,400 7,800 5,600 4,600

Location Ozo str. (5 min drive form the city center) Konstitucijos ave. (new city center) Konstitucijos ave. (new city center) Luksio str. Laisves ave. (living district) Ateities str. (living district) Gedimino ave. (city center, main high street) Gedimino ave. (city center, main high street)

Number of operators ~ 200 ~80 ~100 ~36 ~25 ~30

Anchor tenant Hyper Maxima Apranga, Levuo, Danbalt, maxima X None Rimi IKI Rimi Seppalla, Terranova Apranga, Danbalt, Pizza Jazz

Table 2. Existing shopping centers in Vilnius. Source: Re&Solution, Koba Retail property market review 2006, http://www.resolution.lt/repository/research/Prekybinio_NT_rinkos_apzvalga_2ketv.pdf 17 Baltic property market report, http://www.resolution.lt/repository/research/baltic_report2006.pdf

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The biggest and most attractive centers worth consideration for the new international retailer when choosing location is described in more detail: Akropolis www.akropolis.lt Opened in 2002 Akropolis shopping center soon became retail and leisure capital. Being more then 108.000 sq. m. size it is biggest shopping center in Lithuania and in Baltic States. Akropolis is located in geographically convenient place. It takes 10-15 min by car or public transport to come from city center. Next to shopping center is spacious parking with 3,500 lots. Shops in Akropolis are divided into following categories: clothing, footwear, for your home, free time, children, beauty, other. In the clothing category shops in acropolis have brands such as : Apranga, Aprangos galerija, Audimas, Camel Active, Dzincu centras, E 5 Mode+, Este, ETAM LINGERIE, Imitz family, JNK dzinsai, Kaubojaus sapnas (jeans wear), Koton, Monton, Only, Ravel , Reserved, Simpatija (lingerie), Terranova, United colors of Benetton, Utenos trikotazas, Vero Moda. First in Lithuania Esprit shop was opened there in beginning on April this year. There are also operating different service providers from hair salons to tourism agencies; around 10 restaurant and cafés are located in Akropolis. There are number of entertainment and leisure facilities – Akropolis Ice (ice-field), APPOLO bowling, Forum Cinemas Akropolis and children entertainment place Europa. Europa www.europa.lt This shopping center is located in new city center, close to new municipality building and in the neighborhood of new apartment skyscrapers. The aim of this fashion and style center is to create comfortable, pleasant and exiting shopping atmosphere. Glass roof and a lot of live plants create engaging atmosphere. In the area of 21,500 sq. meters are located 80 shops, 4 restaurants, 5 cafés, salons and various service providers. There are also 7 floors parking facilities. In Europa shopping center shops have brands such as Ieva (pantyhose, socks etc.), B-Young, Marc O`Polo, Apranga, Etam, Etam Lingerie, Elitman, Gerry Weber, Vip-X (just design clothes such as DIESEL; CALVIN KLEIN; PIERRE CARDIN; EMOCIONE), City men and women, Mexx, Baltman, Big Star, Bimbo (for children till 14 years old and mothers-to-be), Marli Woman, Cipollino (for babies and children), Colin’s, Džinsų centras, Frank Walder, Lelija, Miglė (lingerie, sleep wear, home clothes), Monton, Pati pati ( lingerie), Reserved, Rožė, Tommy Hilfiger, Triumph and Vero Moda.

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To attract more customers there are constantly going different events, shows and promotions. There is also possible to get privileged discount card to use at Europa and other places all over the town. Flagman www.flagman.lt This shopping center is one of the smallest tin Vilnius, but it is located in strategic place – high street Gedimino Avenue. There are 26 operators – 1 beauty salon, 1 café and 24 shops. In Flagman shops have following brands – Bid star, Bliss, Calliope, Donna, Dzinsu centras, E5mode, G&G Fashion, Grizas, Ieva, Seppala, Terranova, Triumph and Vilnos takas. Grand Duke Palace www.gdp.lt This is the newest shopping center in Vilnius opened 2005 and is situated in strategic location in Gediminas Avenue. Grand Duke Place’s peculiarity is that there are concentrated very well internationally known clothing retailers selling goods at higher prices. There have settled one of the brightest Great Britain fashion world representative – Karen Millen and as well popular fashion brand Oasis. There are also shops of such well known international brands as Diesel, BGN, Quiksilver, Energie, Tintoretto, Waggon, Miss Sixty, Moskito. The store in this shopping center also has well known Lithuanian clothing brand Roze. There is also shops of brands such as Alla Moda, Elitman, Divo, Šai, Amadea line, Emelda, Millena, Toskana, Impresija. In Grand Duke Place also are located famous Latvian brand Drogas presenting beauty and health goods. Other operators are leaders in their industry offering exclusive, higher quality and higher price good and services Figaro hairdresser, Kelioniu opera is representative of well know travel bags and accessories brand Samsonite, Art House exclusive presents and interior accessories salon. There is also located Pizza Jazz restaurant. In next 12 month number of new, big shopping centers will be opened in Vilnius. List of them presented in the Table 3.

Name
Gedimino 9 Panorama Helios city Ozas BIG

Net area, sq. m.
15,000 52,000 7 000 50,000 15,000

Location
Gedimino ave. ( city center, main high street) Saltoniskiu str. Konarskio str. Ozas str. (5 min drive from city center) Ukmerges str.

Opening date
2007 spring 2007 2006 2008 2006

Table 3. Shopping centers under construction and planned. Source : Koba.

There are several attractive new shopping center projects that are worth more detailed description: 38

Gedimino 9 www.gedimino9.lt This 15.000 sq. meters letable area shopping center with retail/leisure space over 5 levels in prime location with easy pedestrian access and parking will be opened in 2007 spring. It will offer perfect combination of modern and classic architectural styles and modern management services. Panorama www.panorama.lt This shopping center of 52.000 sq. meters net area currently is under construction and is planned to be opened in autumn 2007. Project is aimed to fulfill family and to fill increasing middle class needs. There is planned to have more then 120 shops, 15 restaurants and cafes, big leisure zone also 1.900 places parking facilities. There are 150 busses and 560 trolleybuses and around 74.000 citizens by own or public transport passing this location per day. Ozas www.ozas.lt One more big (50.000 sq. meters net are) shopping center in Vilnius is planned to be opened in 2008. It will be located 4 km from city center and its catchment is 309.000 citizens with 15 min drive time. In Ozas shopping center will be many shops, restaurants, cafes and entertainments, such as bowling, disco, casino and others. Map of existing and planned shopping centers in Vilnius is presented in Appendix 5. 5.2.1.1 High streets There are fourth main retail and leisure streets in Vilnius: Gediminas Avenue, Pilies Street, Vokieciu Street and Didzioji Street. Every one of them is unique in terms of location and attractiveness for the buyer and retailer. The main street in Vilnius Gediminas Avenue is city’s high street recently renovated with big variety of local and international retail shops. Gediminas Avenue representing almost all major retail brands (e.g. Zara, Mango, 39

Mexx, United Colour of Beneton etc) is particularly attractive for every retailer to establish flagship store there. There are also locate many popular restaurants and cafés making it place for ultimate shopping and leisure time experience. High concentration of shops, restaurants, hotels, businesses and tourist sights maintain a constant pedestrian flow each day through the year. The average pedestrian flow is 30.000 per day. There are 50.000 Besides local rich residents. historical

heritage attracts visitors and tourists. There are around 40 busses per hour between 6.00 and 22.00 passing by Gediminas Avenue. There are 1.400 existing, 400 under construction and 400 planned parking places.
Gediminas avenue. Source : Koba

Pilies Street historically being main shopping area now is converting to tourist-oriented (amber, souvenirs shops) and leisure (restaurants, bars) area. Vokieciu Street some time ago was attractive for both retailers and customers, but lack of sufficient pedestrians’ flows, complicated parking and rapid development of shopping center outside the city center and customers’ preferences to shop there turned street more to the leisure area. Very few retail shops are left there. Didzioji Street became most luxurious street in Vilnius where shops or boutiques have brands such as Armani, Hugo Boss, Roberto Cavali, Escada etc.

5.2.2 Rent prices
Rent prices in shopping centers mostly is based on several aspects – attractiveness of the object, sufficient customer flow, strategic location, strong anchor tenant, good tenant mix and also entertainment and/or leisure facilities. Depending on the position and size of premises rent in Vilnius shopping centers may vary from 7 €/sq. m./month to 45 €/sq. m./month. Anchor tenants Rent €/sq. m./month 7 -10
Table 4. Rent prices in shopping centers. Source: Koba

Medium areas ( > 100 sq. m.) 10 – 30

Small areas (< 100 sq. m.) 30 -45

40

Rent prices in Gediminas Avenue depends on customer flows. The biggest flows are in part A (see Gediminas Avenue map above) therefore rent there is from 40 to 64 €/sq. m. per month. Going further flows of customers decrease, and more gaps appear in between shops due to institutional buildings and squares with consequently makes rent prices lower to 20 – 23 €/sq. m. per month.

Rent €/sq. m./month

A part 40 – 64

B part 35 – 40

C part 29 – 32

D part 20 – 23

Table 5. Rent prices in Gediminas ave. Source: Koba.

Due to streets characteristics there is difference in rent prices from 30 €/sq. m. per month in Vokieciu Street to 40 €/sq. m. per month in Didioji Street with Pilies Street in between with 35 €/sq. m. per month.

Rent €/sq. m./month

Vokieciu st. 30

Pilies st. 35

Didzioji st. 40

Table 6. Rent prices on other high streets. Source: Koba.

5.2.3 Customer flows
According to Re&Solution real estate company average flows of customers in shopping centers depending on location, catchment area and attractiveness of tenants mix vary between 28 000 for smaller ones located in high streets to 300 000 customers per week - for regional shopping centers. Shopping center in high streets Neighborhood shopping center (catchment area – neigh. Living districts) 40.000-65.000 City shopping center (catchment are – the whole city) 55.000-140.000 Regional shopping center (catchment area - surrounding area) 220.000-300.000

28.000 – 40.000

Table 7. Average flows of customers per week. Source: Re&Solution.

5.2.4 Main players in fashion retail market
Fashion retail market in Lithuania is dominated by few local retail companies that are managing groups of foreign brands. By creating brand portfolios they diversify and cover different market segments creating bigger market share. Top three players “Apranga”, “Baltica Lietuva” and “Levuo” take some 60% of specialist sales in the country. These retailers have accordingly 45, 22 and 27 shops in biggest cities. Other brands are sharing around 30% of the market. The rest of 41

the market is taken by grocers, non-specialist and very small retailers that work in market-place type shops. Most of the shops are located in the capital Vilnius, second largest city Kaunas and harbor city Klaipeda. Number of shops of three top players, presented brands and their distribution in the country is presented in the detailed data table in Appendix 2. Most popular distribution channels in the country are shopping centers. Every company is trying to have shops in the biggest shopping centers in every big city in the country. In the capital Vilnius on the Gediminas Avenue which can be seen as high street, companies are opening their flag shops. Depending on the brand’s profile and positioning some of them have boutiques and independent shops. Examples are high fashion retailers such as Emporio Armani, Hugo Boss or Escada. Their boutiques are located mostly in the Old Town on Didžioji Street which lodges high fashion retailers. Same is seen in other towns when luxurious boutiques are located on very prime locations. The leader in Lithuanian fashion retail market is “Apranga” with the market share of 30 % and 45 shops in Lithuania, 15 in Latvia and 1 in Estonia18. Till the end of this year it is planned to open 7 more shops and then group will be managing 68 shops in Baltics19. Apranga group is developing 5 different types of shop systems and separate shops: • • • ZARA – franchise shops in Baltics; Clothes for all family – APRANGA shops; Clothes for young people – retail chain APRANGOS GALERIJA ( brands „Miss Sixty“,

„Mexx“, „Morgan“, „Blend of America“, „Jack &Jones“, „S.Oliver“, „Tom Tailor“, „Naf Naf“, „Broadway“, „Blend She“), Bershka, Pull & Bear in Lithuania and MOSKITO in Latvia (brands „Blend of America“, „Jack &Jones“, „Tom Tailor“, „Naf Naf“, „Broadway“, „Ichi“, „B Young“, „Blend She“) and franchise shops Mango, Miss Sixty/Energie, Mexx, Jack&Jones/Only; • Clothes for business people – retail chain CITY (brands „Joop!“, „Strellson“, „Marlboro Clasic“, „Roy Robson“, „Betty Barclay“, „Gerard Darel“, „Mariella Rosati“, „Apriori”, „Marella“, „Bandolera“) and franchise shop Betty Barclay; • Luxuty clothes, shoes, accessories – “Ermenegildo Zegna”, “Emporio Armani”, “GF Ferre”, “Hugo Boss”, “La Perla”, “ Mados linija” ( brands “ D&G”, “D&G Jeans”, “Just Cavalli”, “Exte”, “Versace Jeans Couture”, “Roberta Scarpa”, “Custo”, “Jean Paul Gaultier Jeans”, True Religion”, “Seven for all mankaind”, “Scervino street”, “Dirk Bikkembergs”).

“Apranga” group web page http://www.apranga.lt/index.php/apie_aprangos_grupe/apie_mus/62, retrieved on 14th September, 2006 19 http://www.delfi.lt/news/economy/business/article.php?id=10700904, retrieved on 14th of September, 2006

18

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Last year turnover of Apranga group was more then 58 million EUR. This year it is planned that turnover will be 82.5 – 84 million EUR. Turnover growth of the group is illustrated in the Table 8 bellow.
Yearly data of Apranga group 2002 2003 21,734 27,440 Turnover ( thousand EUR) Turnover growth compared with the 26% same period of previous year n/a n/a Turnover of shops in Lithuania 21,428 ( thousand EUR) Turnover growth compared with the same period of previous year n/a n/a
Table 8. Apranga group turnover. Source: Apranga annual reports.

2004 39,569 44% 24,307 13%

2005 58,150 47% 32,148 32%

Apranga group is strong player in the market and is growing every year. They have franchise shops of very well known and popular brands such as ZARA, MANGO, Bershka, number of luxury brands Hugo Boss, Emporio Armani and many others. So with the well known brands and big retail chain they secure market leaders position. Apranga group have very big ambitions for the future and in next two years are planning to open 50 more shops and to increase turnover till 145-152 million EUR in year 2008. The other second biggest fashion retail market player in Lithuania is “Levuo” company managing 28 shops all over the country. “Levuo” develops three types shop systems: • • • Clothes for all family – Imitz shops; Gedimino 22 – new concept “shop in shop” store in Vilnius; Franchise shops – House of Gerry Weber, Etam Lingerie, Koton, b.young, Etam RTW,

Motivi, Esprit, Tally Weijl. Turnover of the group in 2005 was 12.22 million EUR 6.6% more then in the year 2004. “Levuo” is planning further growth and expansion20. Third biggest player in the fashion retail market is “Baltica Lietuva” managing Monton, Mosaic and Baltman brands. It has 22 shops in Lithuanian biggest cities. Company is the daughter enterprise of “Baltica Grupp” which has 86 shops in Lithuania, Latvia, Estonia, Poland, Ukraine and Russia. “Baltika Lietuva” turnover last year was 8.3 million EUR – 22% more then the in the year 2004. Turnover share of Lithuanian branch was the second in the group and comprised 24 % of all group turnovers21. According to the CEO of the “Baltica Grupp” Meelis Milder their success in competitive fashion retail market was right collections, efficient resource management
http://www.levuo.lt/index.php?cid=858, retrieved September 3, 2006. http://verslas.banga.lt/lt/spaudai.full/4402dd24ca983?vbanga2=a87b88494bd4746266320aae43f6d98c, retrieved on 14th of September, 2006.
21 20

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and centralized coordination of retail as well strong subsidiaries’ teams. Flexible price policy and bigger discounts contributed to the profit growth as well22.

5.4 Lithuanian customers
When entering new market it is important to know character, attitude and preferences of the local shoppers. In Lithuania it is not so easy to describe statistical shopper as there are some important changes in the regions. Main reason for differences in attitude and preferences is income level. As the Figure 14 shows the highest incomes are in Vilnius, Kaunas and Klaipeda regions (region locations see in the map). Consequently consumers there can spend more for clothes. Higher income level in these regions also effect demand. Customers are looking for quality and the fashion. Many fashion retail companies operating in Lithuania in response to the market and consumer needs have shops particularly in these cities. This was already shown in the chapter above. Though lately can be seen that retailer started to open shops in other towns – Siauliai, Panevezys, Utena as well. The reason is that other locations in the country are becoming economically stronger then before. In response to consumer demands shopping center are opened there as well.
Average income per person in household in the 200 regions
150 EUR 100 50 0
re Ka gi on un as re Kl gi ai on pe M da ar re ija gi m on po le Pa re ne gi on ve zy s re Si gi au on lia ir Ta eg ur io n ag e re gi Te on ls ia ir eg io U te n na re gi Vi on ln iu s re gi on Li th ua ni a

Al yt us

2003

2004

2005

Figure 14. Average income per capita by regions. Source: Lithuanian Bureau of Statistics

22

Ibid.

44

According to the Lithuanian Bureau of Statistics average spend for clothes and shoes per person in household in 2005 was almost 15 EUR per month. The amount is higher in Vilnius, Kaunas and Klaipeda area. Expenditure for clothing is gradually increasing as it is illustrated in the Figure 15. Lithuanians on average spend 8% of their income for clothing and footwear. The percentage is similar as in other EU countries23 where expenditure for clothing and footwear amounts to around 6 % of total income. As the total income increase the sending for clothing will increase as well.
Average spend for clothes and shoes per person in household 20
15 EUR 10 5 0
Li th ua Al ni yt a us re Ka gi un on as Kl re ai gi pe on M da ar ij a re gi m on po Pa le re ne gi ve on zy s re Si gi au on li a ir Ta eg ur io ag n e re Te gi on ls ia ir eg Ut io en n a re Vi gi on ln iu s re gi on

2003

2004

2005

Figure 15. Average spend for clothing and footwear per person in household. Source: Lithuanian Bureau of Statistics

But nevertheless shopping habits and common characteristics are changing in Lithuania. Habits are affected by fast growing economy, life style evolution, shift of values etc. In the past very popular markets and small shops on the corner are slowly disappearing. Customers now prefer shopping centers with huge assortment or specialized shops. This shows that customers are becoming more demanding and the importance of the choice is growing. It can be noticed that people now are looking for authentic, special, original products more then before. In the past there was much more important to get the good. Essential was the fact, the filling of need. There was tendency to use one canon, one style and colour. Now it is important the good itself. Through goods people express personality, character, and uniqueness. Oneness and originality became essential criteria not only in choosing shoes and clothes, but also when buying home appliance goods, mobile phones or cars. Now more often then before in the shops can be seen blue fridges, red sofas and orange coffee makers. Home décor and similar shops are opening with mushroom growth.

23

Europe in figures, Eurostat yearbook 2005

45

Now in Lithuania can be observed one more new tendency – there are becoming more people who shop not for result, but for emotions that shopping calls. Shopping becomes as entertainment. Thus much more preferred are shops with high assortment, comfortable layout and pleasant environment. This can be supported by fact that number of modern shopping centers in Lithuania have increased significantly. Just in capital Vilnius in next few year there will be opened 5 new shopping center which with already existing will comprise of more the 370 thousand sq. meters. New developments will be opened in Kaunas – Akropolis shopping center, in Siauliai – Saules miestas, Bruklinas, in Panevezys - extension of already existing huge shopping center Babilonas, in Utena, Alytus and other towns in Lithuania. These in general described characteristics are reflected in clothing retail as well. Customers prefer shopping center where different brands are under one roof; they are looking for original outfits to express personality and to be different. But still more then anything else price influence decision for the biggest part of population. According to TNS Gallup market research company the strongest motivator to buy is low prices and discounts.
Purchase promotion method
0 Promoted by mail or email Order on mail catalog Was recommended by salesperson at shop Of f ered by sales agent at home or at w ork Recommended by f riend Of f ered in public event (eg. concert) Tasted or tried at shop Advertised on TV, redio, new spaper, magazine etc. Advertised at shop or other retail place Addvertised on internet Recommended by specialist (eg. Doctor, hairdresser etc.) Of f er w ith charity practise* Of f er w ith gif t or w ith participation in lotery Discounts, discounted prices Of f er by phone
% of customers w ho used it in 2005

10

20

30

40

50

Figure 16. Purchase promotion methods. Source: TNS Gallup24. * - offer with charity practice is offer when share of price goes for charity project.
24

TNS Gallup research presentation http://balticmarketing.com/Password2005/Lithuania/DegutisPDF.pdf#search=%22tns%20gallup%20degutis%22

46

As it is shown in the Figure 16 in year 2005 for more then 40% customers strongest motivator was discounts and offers to buy when you can get gift or participate in the lottery (19%). Looks like customers are willing to get more goods or more value for the money. In many cases people are looking for balance between the price and quality. Only low price is not the main criteria. People want to get quality as well. This fact was supported by Egle Radeckiene25, senior consultant of retail department at UAB “KOBA”. In the personal interview she emphasized that when it comes to fashion retail market in Lithuania there is un-filled demand for fashion and quality for low prices. Many companies keep too high prices. The other problem is that people are hungry for fashionable goods, but retailers are slower in responding to latest trends. Beside very often people do not find the item they are looking for or it do not fit. Times when fashion from Europe was late are gone. Now aiming to be successful in the market company has to present latest trends otherwise part of the customers will be lost for the retailers in the foreign countries. Lithuanian market needs more brands like ZARA who offers fashion, quality and price balance and always brings latest collections. That’s why these shops are always full with customers.

5.5 Doing business in LT
In the recently announced World Bank report “Doing Business 2007” Lithuania is 16th county in the world in ease of doing business26. Despite the fact that rating went one position down comparing with the year before Lithuania stay above Latvia, Estonia and all EU newcomers. In the Europe and Middle Asia region Lithuania is in the 1st place. Ratings by criteria are presented in the Table 9 bellow.
Economy LITHUANIA Getting credit 33 Ease of doing Starting business business 16 48 Protecting investors 60 Paying taxes 40 a Dealing licenses 23 with Employing workers 119 Registering property 3 Closing business 30

Trading across Enforcing borders contracts 32 3

Table 9. Doing business in Lithuania ratings. Source: World Bank report.

According to this rating Lithuania is relatively attractive country for entering and doing business. Country is obliged to enter Euro zone as soon as Maastricht criteria will be match. This will increase Lithuania’s attractiveness.

25 26

Personal interview was held on 4th of September, 2006. http://www.doingbusiness.org/EconomyRankings/Default.aspx?direction=asc&sort=1

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5.6 Taxes
Retail business unit in Lithuania has to pay following main taxes: • • • • • • Profit tax – 15% of profit. Social tax – 4% from yearly profit. Social security taxes – 30% (27%+3%) paid by employee; 30.98% is paid by company. Real estate tax – from 0.3% to 1% of real estate market value depending on region and municipality. Land tax – 1.5 % from land market value. And other taxes depending on company individual situation (e.g. ecology tax).

VAT tax in Lithuania is 18%.

5.7 PEST analysis
PEST analysis is a useful tool for understanding market growth or decline, and as such the position, potential and direction for a business. PEST stands for Political, Economic, Social and Technological factors which are used to assess market. Following these factors framework for assessing Lithuanian market situation was created. This analysis helps to summarize main facts, to see overall market situation and how it fits to H&M criteria.

POLITICAL FACTORS
• Lithuania went through the way of economical and political reforms, have transited from state-regulated to market-based economy. Joining NATO and EU added even more importance and opportunities for the country which is now one of the fastest growing economies in the Europe. • Political environment is stable and favorable for business. Some political events and changes are undergoing, but do not have huge influence for country life as every government, ministries continue main works of previous colleagues. So continuity is ensured. • Besides being EU member Lithuania conform to main European legislation. Country is member of main international organizations. In the near future some political decisions regarding taxation and social system can be expected.

ECONOMIC FACTORS
• Economic situation in the country is stable and experiencing fast growth. Decreasing unemployment, increasing earnings and fast GDP growth indicate potential of the country.

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Future forecast state that growth of economy will continue with some slow down, but still stay high, unemployment will be decreasing, wages will be growing faster then all economy. Inflation rate will stay around 3%. • • Lithuanian currency Litas is pledged to Euro at the rate of 1 € = 3.4528 Litas. Lithuania has obligations to introduce Euro as soon as country matches criteria of Maastricht. Changes in taxation system are still happening. This year was reduced part of citizens income tax from 34% to 27% and it is planned further reduction till 22%. There are plans to change VAT and Income taxes. Retailers do not face any additional taxes. • Lithuania is in four seasons climate zone thus seasonality have some effect on retail. There are seen different demands in every season. Clothing and footwear retailers in Lithuania face season timing threat similar to other European countries. • Clothing retail market in Lithuania is concentrated as 3 top players are taking 60% of the market. Most popular distribution way is shops in shopping centers and prime locations in main streets. • In fashion retail market in Lithuania problems are too high prices, lack of fashionable goods, and a lot of unsatisfied customers who do not find what they are looking for. Best motivator to buy is discount, gift or participation in lottery. Very popular discount, point collection cards to attract loyal customers.

SOCIAL FACTORS
• Lithuania is relatively small country and population is constantly decreasing mostly due to migration. Population ageing problem which is common for many countries in Europe is seen in Lithuanian as well. Youth and main labour force is concentrating in 4 biggest cities. • • • Increasing earnings lead to increasing purchasing power. Hence still far way to go to reach EU level. Overall social situation in country is improving. Biggest part of income Lithuanians spend on food, in second place is expenditure for housing and in the third expenses for transport. Spending on clothing and foot wear is in the fourth place. • • Thus not always people find what they are looking for. Consumers in Lithuania is changing and becoming more demanding. Individuality, uniqueness, originality is the value. Price and quality balance is also important, hence consumers are price conscious. Preferences and criteria differ in regions. • • Shopping is becoming way of entertainment, mean to have good time. Online sales are not very popular in the country. Customers prefer buying at shops.

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The best media way to reach customers is through TV and printed media.

TECHNOLOGICAL FACTORS
• • Most of the technological ideas and improvements in retail business come from foreign countries. Little is created locally. Exception is IT solutions. Information spreading and communication technologies are functioning well.

This non-finite list of factors indicates that economically growing country reached the moment when it is ready to take and is attractive for international companies which can fill uncompleted needs. It is right time to enter and establish positions in the country as many aspects are sufficient enough and things not being perfect today will improve in the future.

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6. H&M and Lithuania
H&M Company’s growth and expansion is based on profitability. As it was already mentioned in chapter “Expansion strategy” company is considering factors such as demographics, employment, purchasing power and purchasing behaviour, evaluate shopping areas, shopping centers, neighbour stores, competitors’ location, traffic flows, accessibility by public transport when planning to enter new market. Location for the store is probably most important criteria as it ensures customer flows and herewith incomes. Lithuanian market situation and criteria important for H&M is described and analyzed in this section.

6.1 Overall market situation
Fashion retail market in Lithuania is dominated by local chains selling foreign brands. Lately market is experiencing fast development as many new well known in Europe and world brands are entering country. Though many new brands like GANT, Marc O’ Polo, Karen Millen and other are targeting high income segment. And in many cases they do not sell latest fashion as simply flows of good in these shops are not active enough. Other newcomers– for example Takko Fashion from Germany –are targeting low income segment, but their offers do not reflect latest trends as well. Hence middle and lower income customers who are looking for the fashionable goods are not served. Therefore fashion retailer like H&M would definitely take sufficient market share. First it is already known by Lithuanian shoppers as many people are traveling abroad and got to know H&M there. Second company offers style, fashion and quality for the best price – that’s exactly what is most demanded in the market now. Third H&M collections for men, women, teenagers and children consist off basic garments as well as clothes that reflect very latest trends which make it easy for different customers to dress their own style. Closest H&M’s competitor Intidex group shops are already several years in Lithuanian and other Baltics markets. And they are successful. Every year new shops are opened and new brands introduced. Zara, Pull&Bear, Bershka brand shops are on high streets or best shopping center in all Baltic States. It is a good time now to enter fashion retail market and establish strong position as it is undergoing market growth and development. There are opening many new shopping centers in convenient locations and segments that H&M is targeting are not served yet.

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6.2 Economical and social conditions comparison
Lithuania is the largest of three Baltic State countries with 3.4 million citizens. Country is not the smallest in Europe, but would be one of the smaller markets for H&M. As it is illustrated in the Figure 17 smaller countries then Lithuania are UAE, Kuwait,
90000 80000 70000 60000 50000 40000 30000 20000 10000 0
Lu xe S l mb ov o r K ue n g w ia LI TH U a it U AE A Ire N I No lanA F rw d Sl inla a y Do n Sw e va k d itznm ia er ar Au lank Sw st d r Cz Hu ed ia ec ng en k a Be Re r y Po lgiup . Ne Grtu m th re ga l er ec Calan e d Ponads la a Sp nd a Itain ly G Fra UK er nc m e an y

Population

Population ( thousands)

where H&M has shops Figure 17. Population comparison of H&M markets. Source: Lithuanian
Bureau of Statistics; World fact book27

Slovenia and Luxembourg. It is smaller then Slovakia and Greece which are H&M consideration to enter, but bigger then UAE and Kuwait where company opened shops just recently. Natural that company has entered big countries first as offering fashion for low prices to be profitable sales in big quantities is needed. Smaller population disadvantage can be eliminated by higher income. This is the case with Luxembourg and some other small countries. Luxembourg is the smallest country entered by H&M, but with the highest GDP per capita with for the year 2005 was 62,700 USA $28.
In Lithuania in 2005 GDP per capita at purchasing power parity exchange rate was 13,000 USA dollars. Behind Lithuania is just Poland with GDP per capita of 12,700 USA $. Distribution according to GDP per capita of countries Figure 17.
27 28

GDP/capita (PPP) in USA Dollars 70000 60000 50000 40000 30000 20000 10000 0

entered

by

H&M is illustrated in the
Figure 17. H&M markets comparison by GDP per capita. Source: Lithuanian Bureau of Statistics; World fact book

World Fact Book, https://www.cia.gov/cia/publications/factbook/ World Fact Book – Luxembourg, https://www.cia.gov/cia/publications/factbook/geos/lu.html retrieved on August 19, 2006

LI P TH o U la Sl ANnd o Cz Hu va IA ec ng kia k a Po Re r y Sl rtu p . ov ga K ue n l G waia re it e Sp ce a Itain S U ly G we AE er d e m F an Ne F ra nny th inl ce er an la d nd Be U s Calgiu K m An De usada n tr Sw I maia itz rela rk er n la d n Lu N US d xe o rw A m a bo y rg
GDP/capita (PPP) in USA Dollars

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Thought

Lithuania

is
GDP growth, %
8 7 6 5 4 3 2 1 0
Ne th I e ta Porlan ly d G Sw e rtug s rm a it z a l e Be r la ny lg nd Fr ium Fi a nc nl e an Au U d De s K n tr Swmaia r Caed ek na n S d Popa a Lu G lanin xe re e d m ce bo Hu USrg n N ga A Sl o rw r y o Cz K ve a y ec uwnia k a R i Ire ept S l la . o n LI va k d TH U i a U AE AN IA

undergoing fast growth of economy. Country is the fastest in growing Europe. economy

Last year GDP growth was 7.5 %. Analysts of the biggest commercial bank in Lithuania SEB Vilniaus bankas forecast that the GDP growth in and year after 6.2%.29

GDP growth, %

year 2006 will be 6.5% Statistics; World fact book

Figure 18. H&M markets by GDP growth. Source: Lithuanian Bureau of

Hence GDP growth in Lithuania will stay one of the highest growth rate in Europe and the highest among countries where H&M has or is planning to open shops. Same analysts forecast that registered unemployment in the country will go down to 3% this year, but are in doubt that it will go down further. Actual unemployment in the country for this year is predicted to be 6.8% and 6 % for the year after. Fast growing economy and emigration are main two reasons for declining unemployment. Lithuania with the
21,00 18,00 15,00 12,00 9,00 6,00 3,00 0,00
Ku Lu wa Swxe UA it itzmb E e or Nor lan g d Irerwa la y LI TH n d U UK AuAN st IA De U ria n S Ne S ma A we rk th er d e Calandn Hu na s Po ng da a Bertugr y l a Fi giu l nl m Cz a ec I nd k ta l Sl Re y ov p Fr e n . a n ia S c G pa e Sl re e in G ova ce er k m ia Po an la y nd

Unemployment, % from labour force

unemployment rate of 4.8% in 2005 is in more favorable position then H&M planed expansion countries Slovakia Greece and where

unemployment in 2005 was respectively 10.8% and 11.5%.With the declining unemployment rate Lithuania will be

Unemployment, % from labour force

Figure 19. H&M markets by unemployment rate. Source: Lithuanian Bureau of Statistics; World fact book

http://www.pinigusrautas.lt/aktuali-analitika/seb-vilniaus-bankas-nepakeite-bvp-augimo-prognozes.html, retrieved on 16th of September, 2006

29

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close to countries such as UK, Ireland, and Norway and ahead of many countries where H&M has shops. Analysts of SEB Vilniaus bankas also forecast that incomes for citizens in next few years will be growing by almost 10 % a year. In the second quarter of 2006 the average salary in Lithuania was 440 EUR. It is 14% more then the same period last year. Economy growth, declining unemployment and shortage of specialist in some sectors, reduction of income tax from 34% to 27% are the reasons for income growth. As it was mentioned in the text before Lithuanians spend 8-9% of income for clothing and footwear. Able-bodied population in Lithuania amounts to 60 %. If to put aside students and part of older population and to assume that left 40-45% of citizens are getting average salary, then for the clothing and footwear on average per month in country is spent almost 15 million EUR. Hence with 30% market share turnover of the company would be about 54 million EUR. Even these amounts are based on average numbers, they are close to real as UAB “Apranga” with 30% market share last year got 58 million EUR turnover. Spending for clothing and footwear will increase in the future in regards to general income increase. Based on income growth forecast of 10% can be assumed that spending for clothes will grow in similar amounts. For H&M entering country with 4-5 shops in biggest cities on prime locations possible to gain around 5% of the market in first year and on average to have 9 million EUR turnover per year. Lithuania is relatively small country with lower then Europe average income, but experiencing huge economical growth. It is not the country that could guaranty big turnover for the H&M and is not on the top of new market entry list, but nevertheless it is worth considerations. According to some criteria Lithuania is in better and according to other in worse position then countries where H&M is already operating or is planning to enter. Hence overall country evaluation based on economical and social H&M criteria is positive. And in the future will be getting better. Naturally H&M Company might be willing to wait and see how country is developing further, how fashion retail market is evolving while at the same time entering other advantaged countries. And only when Lithuanian economy is stronger and risk lower H&M will enter the country.

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6.3 Retail places
In Lithuania there are three economically most active regions – Vilnius region, Kaunas region and Klaipeda region. It is natural to enter the market with shops in strongest cities. Besides H&M company takes as advantage to be close to competitors. In Vilnius, Kaunas and Klaipeda there are shops of most fashion retail market players. Furthermore these regions are the biggest with 542,000 citizens in Vilnius, 380,000 in Kaunas and 193,000 in Klaipeda. In addition in these cities number of citizens in reality is bigger due to many students studying there. In Vilnius, Kaunas and Klaipeda biggest country universities are located. These cities are visited by business and cultural tourist as well, what naturally increase customer flows in commercial areas. Vilnius is a center of culture, politics and business. Kaunas is second largest city and the only place where well known cheap flight companies such as Ryanair are operating. This means higher tourist flows. Klaipeda is a fast growing harbor city. Many new projects are under development now to attract more citizens and tourist to this part of Lithuania. In these regions as it was presented in chapter describing Lithuanian consumers’ incomes are also higher then in other parts of the country. The highest wages are in Vilnius. It is 20% more then country average. Besides customers in these regions is more fashion conscious then in other towns. People are looking for latest trends, well know brands and value for money. In general people in Lithuania especially girls and women like to dress. More and more men are becoming fashion conscious as well. In last two years on average 10-15 new shops was opened in these regions. 3-5 new brands entered country in that time. Fashion retail market is under development, but soon might be seen mature market signs. Entering new market it is important to make right and strong first step. For H&M the best is to open first shop or shops in capital Vilnius. It is the best to start with biggest city which has highest income, 1 million people catchment area with 20-30 min drive time and is cultural, political, business center. Store location is one of the most important criteria for H&M. All company stores are opened on prime locations, commercial areas with many stores where big customer flows and convenient accessibility by public transport are. In Vilnius the prime location most suitable for H&M is Gediminas avenue in the center of city where customer flows are probably highest. There is a small but still possibility to find premises for separate shop. Thus size would not be big. Many premises are already used for shops or others are occupied by banks, ministries and other institutions. Attractive opportunity to establish in Gediminas avenue is now in the new shopping 55

center which will be opened in the beginning of next year in former municipality building. After reconstruction 18,000 sq. meters modern shopping center will be new premier shopping destination in Lithuania and Baltics. This location would match all H&M criteria – prime location, big customer flows, and convenient accessibility by public transport, close to competitors. Big Zara shop and Grand Duke Palace shopping center is just few hundred meters away. However it is totally new shopping center where developers are planning to place many new brands. The risk is higher as it in not certain how market will react to the new concept, what will be customer flows and turnovers. Then there are a number of shopping centers in Vilnius. Akropolis is the biggest shopping center in Baltic States with 108,000 sq. metes size. It is locates in convenient place, surrounded with residential districts, easy to reach by car and public transport. In Akropolis it is a higher possibility to rent bigger premises, it is a well known place with big customer flows. Not only local people, but also Russians, Byelorussians, Polish visitors are coming there. And competitors are close. There are three Inditex group shops – Zara, Bershka, Pull & Bear and many others. It can be good place to start with. Europa shopping center in the down town of Vilnius is another good place worth considerations. Thus there could be located smaller concept store due to the size of premises. Next year in Vilnius besides Gedimino 9 two other big shopping centers – Ozas, Panorama, – will be opened. This can be potential location for the H&M to open shop. But on the other hand the risk would be greater. The existing shopping centers with clear concept already have position in the market. It is clear composition of tenants, customer flows and its recognition by shoppers. Normally it takes about two years to create successful concept of shopping center and to develop stable customer flows. The other shopping centers in Vilnius are too small or in the secondary locations to be considered for H&M store. For the future expansion to have and idea about other regions it is useful to have short look at Kaunas and Klaipeda cities. In Kaunas the main commercial street is – Laisves avenue – symbol of the city. Shops of all popular brands are located there. Laisves avenue is the best place for flag shop. There can be seen similar problem as in Vilnius because it is more complicated to find premises on high street, but much easier in big shopping center. Two biggest shopping centers in Kaunas are Mega (72,000 sq. m) and Molas (22,600 sq. m.). Akropolis shopping center in Kaunas will be opened in the beginning of 2007. Supposedly it will be as popular and successful as it is in Vilnius. 56

In Klaideda prime location is Taikos and H. Mantas streets where shops of main fashion retailers are located. The leader of shopping centers is Akropolis. The new big project close the sea “Juros vartai” will be opened in three stages from 2006 to 2015. If H&M Company would be planning to enter Lithuania market in near future it still can choose between several attractive locations. It can wait and see how new shopping centers will be performing. Though in the course of time it will be more complicated to find good location for stores as retailer on high street and tenants in shopping centers try to secure their places by long lease agreements and shift of retailer in premises are not so frequent.

6.4 Assumed entry model
6.4.1 Location
As it was stated before, capital Vilnius is the best place to start business and to establish in Lithuania. Of course it can be decided by company to enter with 3 or 4 shops in all main country regions or even to enter all three capitals of Baltic States. There also can be chose to open full range shop in Vilnius and several concept stores in other cities. But to get an impression and to model assumed entry only one shop opening will be analyzed.

6.4.2 Shop
The best existing location for H&M store is Gedimino 9 shopping center on Gediminas avenue in very heart of the city (see map). This is combined modern and classic architectural styles shopping center in prime location with easy pedestrian access and parking. Let’s assume that H&M rented typical for most of company’s shops 1,000 sq. meters size premises on the ground floor of shopping center, on the corner which is facing Flagman shopping center and Zara shop.

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Huge windows in height of almost entire floor will make company noticeable. Ground floor will ensure big customer flows. H&M area very will with few be many brands strong fashion offering
Source: www.gedimino9.lt

competitor in this commercial retailers as it would be one of fashion for low prices on this high street. This full range store will be company’s flag shop. Interior certainly will reflect H&M style and will be intended for comfortable, easy, inspiring and exiting shopping. Shop atmosphere and décor have to be unique and exclusive to make it different and more attractive then other shops.

6.4.3 Assortment
In general womenswear is the largest sector in fashion retail market. Some researches state that clothing for women and children is worth double the market for the men and boyswear. Behind this is simple fact that women buy clothes more frequently for themselves and often spend more per year then men do. Based on mentioned fact H&M should focus on womenswear and to set half of its space in shop and in assortment composition for women’s clothing, accessories and footwear. Mother-to-be and plus size items also have to be included. The left space should be divided between menswear and childrenswear accordingly 2/3 and 1/3 of space. Menswear has to be in shops composition as more and more men are becoming fashion conscious and are looking for fashion and quality at low price. Besides this would equal H&M position in competition field as mail competitors are selling menswear as well. Similar arguments lie behind childrenswear. For the women customers there have to be given chance to acquire clothing for their children and the men in some cases. If in one shop there is placed clothing for all family members shoppers, who are in many cases women, at one visit will find all what they need. There should be made opportunities for customers to spend more money. Since H&M know all segments well and make great collection for every of them there is no point to withdraw any. Based on this, cosmetic has to be for sale as well. Just some collections adjustments have to me made for Lithuanian customer. This can be performed my H&M professional or hired sophisticated local sales manager. Nevertheless offers have to reflect latest fashion trends. Product composition has to include items from all three categories – fashion basics, latest seasonal fashion and latest fashion which 58

is trendiest clothing. Collections made in corporation with famous designers have to be presented for Lithuanian market as well. This kind of assortment composition would be new in the market and make H&M different from others and attractive for consumers. If company will implement same principle as in other markets– that new garments are coming to the shop every day – it will be another competitive advantage. H&M has to learn from other mistakes and not to bring to market “leftovers” or not fashionable goods. Consumers will not forgive this and it can be threat for the image of the company.

6.4.4 Prices
In all market H&M prices goods at the same amount. If in euro zone countries item costs 11.9 EUR so in UK price of the same item is 7.99 £ .Sums are equal in value with some small bias. All goods are sold only under several fixed prices like 7.9 EUR, 11.9 EUR, 14.9 EUR, 21.9 EUR and so on. Thus all items are divided into sort of price groups. Even having different costs items can be placed to the same price group. It is also marketing tool to use prices with 9 at the end. For some customers 99.9 is less then 100. This works as sales promotion. Obviously the same principle will be used in Lithuania. It is not clear which currency company is taking as basis for calculations. But for example item in euro zone countries priced at 7.9 EUR and in UK 4.99 £ in first case is equal to 27.27 Lt (1€=3.4528Lt) and in second 25.45Lt (1£=5.1 Lt). Small difference, but in some cases can be important went competing for customers money with other fashion retailers. So for the described price equivalent in Lithuania recommended to be 24.99 Lt following company’s rules of price composition. Prices of H&M goods sold in other countries and advertised on the company’s internet page is similar to Zara and Vero Moda price levels. So in Lithuania H&M will not have significant advantage on prices, thus can have substantial advantage in offering newest collections and new garments in shop everyday as it is done in all markets.

6.4.5 Staff
To establish shop and to have good start colleagues form neighbour countries most probably Poland and /or head office would give the benefits of their experience for Lithuanians. This is done entering all new markets to ensure that H&M corporate business culture, philosophy and know how is passed on. Corporate culture is one of the contributory factors to company’s success over the years. Some positions like marketing manager, public relation manager and similar are not needed in each country. Mentioned and other tasks can be and are performed centralized in the head office

59

in Sweden. Even accounting might be performed through head office. Hence local team is mostly responsible for main retail activities and shop management. Staff composition in the shop can be as following: shop director, accountant, sales manager, 2 senior salespersons who would assist sales manager and work on the floor as well, 5 sales persons to work full day and 5 sales persons to work part time. That would be the basic team of 15 people. Cleaning is outsourced to the cleaning company serving entire shopping center. Depending on circumstances and business activities composition can be changed. On the shop floor as minimum there will be 2 cashiers, so minimum 2 sales persons will have to be serving customers there all the time. Other 5-6 sales persons have to stay on the floor – serving customers, arranging and sorting goods, if there is a need to help by the cashiers. On the busy hours and/or busy days part time sales persons will help. All floor staff will work according to moving schedule. As shopping center is opened long hours and seven days a week the day will be split to shifts. Employees are paid according to their position and level of payments would reflect current labour market trends. Preliminary salaries would be as following: Shop Director 1,450 EUR (5000 Lt) Accountant 870 Lt (3000Lt) Sales manager 870 Lt (3000Lt) Senior sales person 435 EUR (1500 Lt) + % from turnover Part – time sales person 200 (700Lt) + % from turnover Total x x x x x 1 1 1 2 5 5 15 = 1,450 EUR = 870 EUR = 870 EUR = 870 EUR = 1450 EUR = 1,000 EUR 6,510 EUR

Full –time sales person 290 EUR (1000 Lt) + % from turnover x

Salaries for the employees have to include motivation aspect. Part of wages for the employees who directly may affect sales would be fixed to ensure minimum payment and the other part would be a share of percentage from turnover. For example it could be 0,05% of revenue shared among all sales persons. Per month 0,05% from 173,770 EUR30 will make 870 EUR . This number would be shared among all sales persons and would amount 72.5 EUR per person. For the shop director and sales manager can be offered bonus in accordance with company’s policy. To pay for employees 6,510 EUR for company will cost around 13,000 EUR, because 27%+3% from gross amount for social security taxes pays employee and 30,98% from the same amount
30

Explanation of the amount in chapter 6.4.8 Turnover

60

for taxes is paid by company. Roughly speaking for company it cost double the amount which is paid to employees.

6.4.6 Marketing
It is very important to inform as many people as possible about H&M entry in the market. It should be devoted serious recourses for the marketing campaign as awareness will create and increase potential customer flows. Marketing have to work together with customer service as attracted customers shouldn’t be lost due to pure service at the shop. If customers leave shop happy and satisfied they will tell this to the friends and word-of-mouth is the best advertisement. Marketing campaign has to be created in a way to reach every targeted segment. Many women and teenage girls read magazines. H&M should prepare attractive printed advertisements for magazines such as Cosmopolitan, Moteris, Laima, Panele etc. Printed ads also should be places in popular news papers. There also should be created TV commercial to make people curious. In the beginning could be shown just a small part of commercial stating that big news is coming to Lithuania. It would work as a teaser. Later the rest of the commercial should be shown to introduce H&M and to inform about shop location and opening. The other advertisements and commercials shall be designed to inform about H&M as a brand in general. To make people familiar with it and interested to visit shops. There also should be made and strongly advertised H&M Lithuanian version of internet page. As it gives so much information about the company, fashion, collections, offers etc. This would serve more as information provider, not as distribution channel as Lithuanians don’t buy on Internet much. H&M shall use gift card as it does in other markets to promote sales. This also would equal company’s position when competing with other close retailers as they also do this. Discount cards would also be a good idea to make people buy at H&M stores. As it was mentioned in the chapter “Lithuanian customers” discounts and gifts are the strong motivators to buy. So H&M should use this attribute. Catalog or H&M magazine should be prepared as well with the aim to inform about latest fashion trends and H&M offers. Colourful and attractive bags for goods can also be a way of increasing awareness about H&M. The more often people will see, hear or in other ways experience brand presence the more of them will choose this brand when making decision consideration list. Later all marketing campaigns would be same or very similar as in all markets just with language and other small adjustments. 61 to buy clothes or at least put it in

6.4.7 Uncoverable company costs
For the tenants in shopping center expenses comprise of three main parts – rent payments, direct and indirect service payments and internal company expenses such as salaries.

6.4.7.1 Rent price In Gediminas avenue part where Gedimino9 shopping center is located rent prices vary from 40 to 64 EUR/ sq. m per month. In the new shopping center for the premises on the ground floor rent price might be 60-65 EUR/ sq. m. However tenant such as H&M is able to negotiate lower rent price. There can be two ways to settle rent payments – one is fixed rent price per sq. meter per month; second is fixed lower rent price per sq. meter then in previous case plus percentage from turnover. When establishing in new shopping center without real data on business activities and turnover it is better for tenant if rent is counted based on the second model. However if the business is going really well the payment for rent may become too high. Consequently there has to be used protection – fixed maximum payments. In further calculations it is assumed that H&M negotiated fixed rent price of 25EUR and 2% from turnover plus 18% VAT tax, but with the condition that the amount will not be higher then 50 EUR per sq. meter per month. There also has to me mentioned that now in all lease agreements is included CPI (consumer price index) indexation. It can be expected 2.5 – 3% of rent price increase per year. Though tenant my fix the cap of increase and in this way will have security to some extend. Accordingly H&M for 1,000 sq. m rented premises on average per month would pay: 25 EUR 173,770 EUR 31 Total Rent payment per year for company would then amount 403,206 EUR. 6.4.7.2 Direct service payments Direct service payments are payments for services directly used by tenant. They are as following – electricity, cold and hot water, heating, cooling, gas, communications. Payments are based on measurements and calculated individually.
31

x x

1,000 sq. m 2%

x x

18% VAT 18% VAT

= =

29,500 EUR 4,100.5 EUR 33,600.5 EUR / month

Explanation of the amount in chapter 6.4.8 Turnover

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To have an idea how much cloth retailer may be paying for direct services and get approximate numbers for calculation data of existing similar cloth retailer in other shopping center will be used. Calculations are presented in the Table 10.
Direct expenses Electricity Cold water Hot water Heating Cooling Phone Total

Measurement unit kWh m3 m3 EUR/ sq. m EUR/ sq. m

Quantity 28320 15 0 1000 1000

Rate EUR 0,084 0,985 1,613 0,055 0,75

Total amount EUR (VAT excluded) 2378,88 14,78 0,00 55,00 750,00 80,00 3278,66

Table 10. Direct expenses calculation. - Calculations are based on summer month consumption. In the other time of year numbers might be different. Prices for cooling and heating in winter time are opposite. So on average amount stays the same all year.

As it is seen in above calculations for the direct services H&M has to be ready to pay approximately 3,500 EUR per month plus 18% VAT tax. The total amount then will be 4,130 EUR/month and 49,560 EUR/year. 6.4.7.3 Indirect service payments Indirect service payments are building exploitation expenses shared among all tenants based on rented area. These expenses include electricity for engineering equipment and lightning in common areas, water, heating and cooling of common areas, inside and outside building cleaning, refuse collection, security, parking exploitation etc. In this amount also can be included real estate and land taxes if the owner of property decides so. It is individual to each sopping center. In Gediminas 9 total rentable are is 13,500 sq. m. H&M rented premises of 1,000 sq. meters forms a part of 7,4%. Thus company will have to pay 7.4% of building exploitation expenses. However in many lease agreements this amount is fixed to 15 Lt/ sq. m. per month (4.344 EUR). Assuming that H&M agreed on this as well indirect service payment per month for company will amount 4,344 EUR plus 18% VAT tax. Then total payable sum will be 5,126 EUR/month or 61,512 EUR/ year. Tenants in shopping centers are also paying fixed amount per sq. meter for marketing. This is reasonable as shopping center managers are preparing promotion campaigns, advertisements, catalogs for shopping center as one unit and every tenant is gaining from increased awareness and customer flows. Based on marketing payment in other shopping centers in Vilnius can be assumed that in Gedimino 9 it will be around 5 Lt/ sq. m per month ( 1.45 EUR) plus 18% VAT

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tax. Accordingly for H&M payment for marketing will amount 1,711 EUR per month or 20,532 EUR per year. 6.4.7.4 Other costs Before shop opening company will have other costs such as store equipment and installation, staff hiring and other operational costs. Equipping store in new shopping center in Lithuania for the cloth retailer will cost approximately 175 – 230 EUR per sq. meter. Thus for H&M to equip 1,000 sq. m shop will cost on average 200 EUR/ sq. m which in total is 200,000 EUR. Staff hiring and organizational costs can be measured by the salaries paid for the shop director, accountant and sales manager who are already hired few months before opening to coordinate all activities. Two weeks before opening 2 senior sales persons and 5 full – time sales persons shall be hired for arranging goods in the shop and to be trained. So during two preparation months H&M for staff will have to pay 13,340 EUR. 6.4.7.5 Total uncoverable costs So on first preparation month costs for company will be: ½ shop equipping expenses Shop director salary Accountant salary 100,000 EUR 2,900 EUR (with taxes) 1,740 EUR (with taxes)
_______________________

Total

104,640 EUR + 5% for unexpected and other expenses 109,872 EUR

Expenses on second preparation month for company will be: ½ shop equipping expenses Shop director salary Accountant salary Sales manager salary 100,000 EUR 2,900 EUR (with taxes) 1,740 EUR (with taxes) 1,740 EUR (with taxes)
____________________________

2 weeks salary for 2 senior and 5 full-time sales persons 2,320 EUR (with taxes) 108,700 EUR + 5% for unexpected and other expenses 114,135 EUR

Total

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After opening on first and following 10 shop operation months during first year uncoverable costs for company based on above calculations will be: Rent payments Direct service payments Indirect service payments Marketing payments Wages Total 33,600.5 EUR 4,130 EUR 5,126 EUR 1,711 EUR 13,000 EUR 57,567.5 EUR/ month (VAT included)

So per first calendar year operational expenses for company will amount around 799,682 EUR. Shall be added that by law according to the situation of the company paid VAT tax or part of it can be retrieved.

6.4.8 Turnover
In other shopping centers in good locations in Vilnius and with high customer flows fashion retailers get approximately 202.7 EUR turnover per sq. meter per month. Though these shopping centers are already operating several years, have clear concept and constant customer flows. For the new shopping center turnover during first year can be something 160 – 175 EUR per sq. meter per month. However in time turnover will be increasing and in shopping center on high street as Gedimino 9 it might be 230 EUR/ sq. meter per month. Hence H&M should be expecting growing income. During first year based on fashion retail market experience can be assumed that H&M turnover will amount on average 170,000 EUR per month increasing till on average 230,000 EUR per month in the later years. Then total turnover of the first operation year in Lithuania for H&M company can be expected to be 2.04 million EUR. It would be more then the turnover company received in Hungary last year, but lower then in any other country. With the expected later years turnover of on average 2.76 million EUR a year Lithuania would come close to turnover per shop of countries such as Poland and Check Republic (see detailed data table in Appendix 1) 542,000 population distribution in Vilnius illustrated in the Table 11 indicate that around 56% of population which amounts 303,520 citizens could be taking decision to buy at H&M plus 17% of population which makes another 92,140 citizens for whom some of decision would be taken. Age group 0 – 14 15 – 24 16% 25 – 34 17% 35 – 49 23% 50 – 64 16% Above 64 11% Percentage share in the total 17% population

Table 11. Population by age groups in Vilnius. Source – Lithuanian Bureau of Statistics

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Besides students who are not officially registered in Vilnius, comers from other towns and tourists would make another relatively big group of potential customers for H&M. Hence if to eliminate those who prefer other brands, have low income etc. there will be around 200,000 potential H&M customers. Last year average spent for clothing per person in household in Vilnius region was 16 EUR per month. This number in reality is higher as not all incomes are captured by official statistics and amounts at least 30 EUR/per person per month. So in Vilnius potential 200,000 H&M customers are ready to spend 6 million EUR per month for clothing and footwear. So first year expected 170,000 EUR per month correspond to 3% of this amount.

6.4.9 Profitability calculations
Analyzing last five years company’s financial data can be seen that H&M gross margin increased form 44% in 2002/2003 financial year till 59.1% last year. Increasing profits in all sales revenue is the result of reduced production costs, efficient logistic system that reduce storing expenses and smart management. Based on the fact that H&M production suppliers are geographically close to Lithuania and one of them is located in the country it is assumed that gross margin will be 65% that is to say costs of goods amount to 35% of selling price. Under above assumptions and calculations first two years H&M income statement would be as following: 1st activity year Turnover Costs of goods Gross profit Gross margin Operating expenses Operating profit Operating margin Taxes (15% profit tax and 4% social tax) Total net profit
32

2nd activity year 2.76 million EUR - 966,000 EUR 1,794,000 EUR 65% - 711,534 EUR 1,082,466 EUR 39% - 205,668 EUR 876,798 EUR

1.7 million EUR 32 - 595,000 EUR 1,105,000 EUR 65% - 799,682 EUR33 305,318 EUR 18% - 58,010 EUR 247,308 EUR

Calculation is made for first calendar year. First two months company does not get income, so turnover is only of 10 months. 33 Including store equipment costs.

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The net profit of the company can be a little less due to other financial instruments such as dividends, interest income and expenses and other taxes. So H&M in first activity year would make profit of more then 200 million EUR and in the second year operating profit is expected to increase four times to more then 800 million EUR. The big difference is due to first calendar year extra costs (e.g. store equipment), lower expected turnover and shorter activity time (in first 2 months no income). The second year operating costs are smaller, but 3% indexation is added in order to reflect changes in economy and prices caused by inflation and other factors. These profit amounts are more then 20% of turnover. For comparison H&M group profit in last several years amounted 10-15% of turnover. It has to be kept in mind that calculations are based on assumed turnovers and approximate costs calculations as this shopping center is not operating yet. Hence the results give some understanding how business may go. Company profitability highly
120000 100000 80000

depends on turnover. Under the previously presented levels of
EUR

First year pesimistic expectations

expenses company experience losses if the turnover is below 90,000 EUR per month (see Figure 20). This amount is break point where expenses are equal to costs. Every turnover above it generates profit.

60000 40000 20000 0 1 2 3 4 5 6 7 8 9 10 11 12

months
Expenses
Incomes

Figure 20. First year pessimistic H&M activity expectations.

When opening shop in totally new shopping center it can be expected lower then market average turnover per square meter while customers will get to know new place. It is not known how Gedimino 9 shopping center will be operating from very beginning. Lower turnover is realistic in the first year. If turnover level will be as it is forecasted by shopping center developers and managers then H&M profitability expectation will look like it is illustrated in Figure 21. Natural to expect lower turnover in the beginning, but based on the experience of other shopping centers in time it will increases to sufficient levels due to prime location and high customer flows in that area. Similar situation illustrated in Figure 21 can be expected if company opens shop in already existing shopping center with known customer flows, clear concept etc. Then turnover increases in time as more people get to know company.

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To sum up - H&M company can expect market average turnover from the beginning. Later income factors, but most probably will go up. Activities in Lithuania can be expected to be profitable for the H&M, but the level of
EUR 200000 160000 120000 80000 40000 0 1

First year optimistic expectations

level will depend on different

2

3

4

5

6

7

8

9

10

11

12

months Expenses Incomes

profitability is not impressive to Figure 21. First year optimistic H&M activities expectations. make entry happen immediately. Company has limited resources, responsibilities for the shareholders and profitability obligations to plan expansion very carefully. Lithuanian will not be the priority entry market while there will be other more profitable markets, but Lithuanian consumers can be sure that one day they will be able to shop at H&M store.

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7. Conclusions
Established in 1947 in Sweden H&M became the leader in fashion retail market by 2006 operating almost 1,200 shops in 24 countries. Based on principle common for Scandinavians that everyone should have an equal choice, company conquered clothing market with the concept – fashion and quality for low prices. Company’s secrets of success lie in focus on customers, constant eye on the market and fast reaction to the new tastes and demands. H&M do not dictate style. Their style is whatever customers demand. Company offers wide range of concepts for women, men, teenagers and children. Plus size and mothers-to-be offers are also in H&M assortment. Efficient logistics and distribution systems ensure short lead times and new garments in shops everyday. New fashion items reach shops in several weeks from the moment they were created. Few middlemen, small intermediate costs, orders in huge quantities and clever management allow H&M to offer clothes for low prices. Company is planning further growth and expansion to the new markets whilst maintaining good profitability. Lithuania could be one of H&M future expansion markets. Country undergone long way of development and is fastest growing economy in Europe. Increasing GDP, faster then economy growth rising wages, decreasing unemployment, favorable business environment make this emerging economy attractive and promising for the foreign companies. Lithuania still has long way to go to reach Europe Union levels, thus it is a good time to enter country and establish business and be there when country will flourish. Growing turnover in clothing and footwear retail market, increasing number of shopping centers, unsatisfied customer needs and increasing purchasing power are other reasons attracting clothing retail companies to enter country. For H&M there is a market in Lithuania as it offers what most customers in Lithuanians are looking for – fashion and quality for low prices. Retail market analysis showed that there are several prime locations for shops that match H&M criteria. It was assumed that H&M open 1,000 sq. meters shop in the totally new shopping center on the high street in Vilnius close to competitors. Calculations were based on market data and experience of other shopping centers. Assumed entry model reveled that based on average market turnover 170 EUR/ sq. meter per month H&M return per shop may be more then in Hungary and close to markets such as Poland and Czech Republic. Profit level would be similar to H&M Group level. Company generates profit if the monthly turnover is above 90,000 EUR which is double less then market average. Based on these facts H&M activities should be profitable in Lithuania.

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Due to the relatively small market size and income level at the moment Lithuania is not on the top of H&M’s priority list to enter. Company has limited resources, responsibilities for the shareholders and profitability obligations to plan expansion very carefully. Lithuanian will not be the priority entry market while there will be other more profitable markets. As it was mentioned in the text company now is concentrating on markets with bigger potential such as USA, Canada, France, Italy, Spain and others. Hence company is also operating in countries such as Slovenia, Czech Republic, will enter Slovakia. With the aim to be well spread out company most probably will enter emerging Baltic States market in the future as well. This may happen in next few years. Lithuanian consumers can be sure that one day they will be able to shop at H&M store

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8. Real facts about H&M in Lithuania
H&M is already familiar with Lithuania and even has supply office located in capital Vilnius. Hence meantime company sees Lithuania as good place for production due to cheep labour force and convenient location, but not as a potential market. However things are changing and country getting economically stronger and become attractive as retail market. Fashion retail leader in Lithuania and Baltics “Apranga Group” was trying to bring H&M to Lithuania as well. During one of the interviews “Apranga “General Director Mr. Rimantas Perveneckas said that they several times contacted H&M company, but their response was that Baltics market is not ready yet and possible entry may occur not before 2008. Same was said to the developers of one shopping center in Vilnius. Several proposals was sent to H&M, their representatives even came to see premises, but finally was said that H&M expansion to Baltic countries is postponed till 2008. So H&M Company is thinking about Lithuania, but entry can be expected only after two years.

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9. Literature list
Books Tungate Mark, Fashion Brands: Branding Style from Armani to Zara, Kogan Page, London, 2005 Articles Anne Marie Doherty, “Factors influencing international retailers’ market entry mode strategy: qualitative evidence from the UK fashion sector”, Journal of marketing management, 2000, issue 16, 223-245, p.225 Bridson Kerrie, Evans Jody, “The secret to a fashion advantage is brand orientation”, International Journal of retail and distribution management, Volume 32, Number 8, 2004, pp. 403-411 Christopher Marti, Lawson Robert, Peck Helen, Creating Agile Supply Chains in the Fashion Industry”, International Journal of Retail and Distribution Management, Volume 32, 2004 Dr. Hayley Myers, “Trends in European Clothing Retailing”, European Retail Digest, Issue 47 Electronic articles “Apranga” press release http://www.delfi.lt/news/economy/business/article.php?id=10700904 “Baltica Group” press release http://verslas.banga.lt/lt/spaudai.full/4402dd24ca983?vbanga2=a87b88494bd4746266320aae43f 6d98c “Baltica Group” press release http://www.vtv.lt/content/view/26003/ SEB Vilniaus Bankas forecast of main economical indexes http://www.pinigusrautas.lt/aktuali-analitika/seb-vilniaus-bankas-nepakeite-bvp-augimoprognozes.html Researches and reports “Apranga” annual and financial reports http://www.apranga.lt/investuotojams/index.php/site_structure/reports_statements/97 Baltic property market report 2006 http://www.resolution.lt/repository/research/baltic_report2006.pdf “Bestseller” annual report 2004/2005 http://www.bestseller.com/bestseller/EN/news/newsArchive/Annual+Report+20042005.htm Commercial property market report 2006, Lithuania, KOBA “Esprit” interim report 2005/2006 http://www.esprit.com/index.php?command=Display&page_id=5 H&M annual reports http://www.hm.com/gb/investorrelations/financialreports/annualreports__investorannualreports.n html 72

High street retail traditions, or when Gedimino Avenue will become Lithuania’s Fifth avenue? http://www.resolution.lt/repository/research/fifth_ave%20tyrimas.pdf “Inditex” Group annual report 2005http://www.inditex.com/en/shareholders_and_investors/investor_relations/annual_reports “Levuo” AB 2005 financial report http://www.levuo.lt/index.php?cid=858 “Mark & Spencer” annual report. Clothing http://www2.marksandspencer.com/thecompany/investorrelations/annual_review06/a/a.shtml Retail property market review 2006, Lithuania http://www.resolution.lt/repository/research/Prekybinio_NT_rinkos_apzvalga_2ketv.pdf Retail Snapshot Lithuania 2q, 2006, Lithuania http://www.resolution.lt/repository/research/Retail_snapshot_2Q.pdf Retail snapshot Lithuania 1q, 2006, Lithuania http://www.resolution.lt/repository/research/Retail_snapshot.pdf TNS Gallup research presentation http://balticmarketing.com/Password2005/Lithuania/DegutisPDF.pdf#search=%22tns%20gallup%20degutis %22 Internet links www.alshaya.com “Alshaya” H&M partner in Middle East web page www.apranga.lt “Apranga” group web page www.hm.com H&M web page www.gedimino9.lt New shopping center project www.levuo.lt AB “Levuo” web page www.mintel.com Mintel - global supplier of consumer, media and market research Statistics and data Doing business Economy Rankings, World Bank, www.doingbusiness.org/EconomyRankings/Default.aspx?direction=asc&sort=1 Eurostat Yearbook 2005 Fashion retailers and shops in Lithuania database, http://www.eb.lt/lt.php3?vid=74&sid=9&search=1 Lithuanian Bureau of Statistics, www.std.lt World Fact Book, https://www.cia.gov/cia/publications/factbook/ Interview With UAB “KOBA” retail department senior consultant Egle Radneckiene 73

Appendixes
Appendix 1
H&M markets by time of entry and their activity results
Country, Year of entry Sweden 1947 Norway 1964 Denmark 1967 UK 1976 Switzerland 1978 Germany 1980 Netherlands 1989 Belgium 1992 Austria 1994 Luxemburg 1996 Finland 1997 France 1998 USA 2000 Spain 2000 Poland 2003 Czech Rep. 2003 Portugal 2003 Italy 2003 Canada Population Number of (thousands, shops, Turnover 2004, Eurostat (opened in 2005 Yearbook) 2005) (EUR mln) 8.975, 7 4.577, 5 5.397, 6 59.673, 6 7.489,4* 82.531,7 124 (-) 78 (3) 56 (3) 102 (11) 52 (5) 288 (19) 667.3 500.3 323.4 661.8 417.44 2,110.2 Sales per shop per year 2005 (EUR mln) 5.38 6.42 5.78 6.49 8.03 7.33 Employees Development trends (full-time) 3872 1523 1066 3408 1317 8778 Online sales, development of existing business, concept stores Online sales, development of existing business, concept stores Online sales, development of existing business, concept stores Good growth opportunities, expansion to the north of country Limited potential, development of existing business Development of existing business, concept stores, planned expansion Opportunity for extension via concept stores, introduction of online sales (2006 autumn) Growth potential is limited Development of existing business, concept stores Expansion is limited Expansion to medium-size cities, concept stores in large cities Important expansion market Big growth opportunities, planned expansion Good growth potential, planned expansion Development of existing business Development of existing business, possible growth Development of existing business, possible growth Big potential for continuing growth Good growth potential,

16.258 10.396,4 8.140,1 451,6 5.219,7 59.900,7 295.655.0 42.345,3 38.190,6 10.211,5 10.474,7 57.888,2 32.494,6

73 (7) 48 (4) 52 (1) 7 (-) 27 (3) 71 (7) 91 (16) 50 (10) 27 (12) 12 (5) 7 (2) 10 (7) 11 (5)

468.5 271.8 461.3 32.34 193.2 563.6 434.8 312 84.85 39 33.1 64.5 66.7

6.42 5.66 8.87 4.63 7.16 7.94 4.78 6.24 3.14 3.26 4.73 6.45 6.07

1840 1260 1681 125 657 2467 2406 1721 601 209 181 383 294

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2004 Slovenia 2004 Ireland 2005 Hungary 2005 Dubai 2006 Kuwait 2006 TOTAL 1.996,4 4.027,7 10.116,7 2 (-) 4 (4) 1 (1) 3 1 1197 27.9 14.45 1.2 13.96 3.61 1.2 70 77 8

planned expansion Exiting, growing market, development of existing business New market, possible growth New market, possible growth

7,750*

33944*

Source: H&M Annual Report 2005. * - without new shops in Dubai and Kuwait.

Appendix 2
Leading players’ by brands and shops’ distribution in Lithuania
Vilnius Kaunas Klaipeda Apranga group shops: Apranga Aprangos galerija Mango Mexx City Mados linija Hugo Boss Ermenegildo Zegna Emporio Armani Max Mara La Perla ZARA Moskito Miss Sixty/Energie Bershka Pull & Bear Išparduotuvė ( sales shop) “Baltica Lietuva” shops: Monton Mosaic Baltman “Levuo” group shops: Imitz Family Imitz Class Imitz Light KOTON ETAM lingerie Gerry Weber MOTIVI ETAM b. young Esprit Tally Weijl Gedimino 22 Other brands: Vero moda 25 4 1 1 2 4 1 1 1 1 1 1 2 1 1 1 1 1 7 3 2 2 12 2 1 2 3 1 1 1 1 16 3 10 3 2 1 2 1 1 7 3 3 1 5 2 1 1 1 14 4 7 1 1 1 1 1 1 1 4 2 2 6 1 1 1 1 1 1 10 3 Siauliai Panevezys 1 1 2 2 1 1 4 1 3 2 1 2 1 1 3 1 1 1 4 1 Other towns 5 TOTAL 45 11 5 3 2 7 2 2 1 1 1 1 3 1 1 2 1 1 22 9 10 3 28 7 1 2 2 3 5 2 1 1 2 1 53 12

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United Colors of Benetton RE-reserved Seppala E-5 mode UT

2 2 2 2 5

1 2 1* 2 4

1 1 1* 1 3

1* 1 1

1 2

2 3

4 5 5 9 18

*- to be opened in very near future.

Appendix 3
H&M’s Code of Conduct H&M’s Code of Conduct is aimed at our suppliers. Its guidelines concern improvements in working conditions in the factories. The guidelines are partly based on the UN Convention on the Rights of the Child and ILO conventions on working conditions and employment rights. The Code of Conduct covers such issues as providing at least the minimum wages prescribed by law, reasonable working hours and allowing freedom of association. Implementation and compliance All of H&M’s suppliers must sign an agreement declaring their intention to comply with the requirements in our Code of Conduct. Not every supplier will meet all the requirements at the start. In order to be accepted as a supplier they must therefore draw up a plan of action describing how they will implement the improvements required by H&M. Repeated or serious violations of the Code may lead to termination of the cooperation with H&M. H&M carries out regular audits of the factories to monitor how well suppliers are observing the Code of Conduct. At H&M’s production offices there are around 40 full-time auditors employed to handle this task. Audits may be either announced or unannounced. In many cases our main suppliers in turn subcontract the production of our products. It is therefore very important that we are able to inspect these factories as well. H&M cannot guarantee that all of the requirements in the Code of Conduct are met by all of the suppliers who manufacture the goods we sell. However, we can guarantee that we engage in a serious and long-term process to achieve lasting changes that improve working conditions in a meaningful way for the coworkers at the factories that manufacture goods for H&M. H&M’s Code of Conduct comprises eight sections: 1. Legal requirements 2. Child labour 3. Safety 4. Workers’ rights 5. Factory conditions 6. Housing conditions 7. Environment 8. Inspections and compliance

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Appendix 4
Map of existing and new shopping centers in Vilnius

- existing shopping centers. - planned shopping centers. Source: Re&Solution.

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