the creation of an external capital funding proposal.

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Milestone Two: Risks- Nordstrom, Inc. 1

6-1 Milestone 2: Risks

Module Six

NORDSTROM EXPANSION INTO SOUTH AFRICA- RISKS

Carmen Hendrickson

Intro

Nordstrom’s plan of expansion into South Africa is will be communicated in this investment project proposal. Supporting evidence from the U.S. Small Business Administration states that over 95 percent of the world’s consumers reside away from the Americas.  The expansion into South Africa will afford Nordstrom the ability to conquer new markets and reach more consumers, while also increasing the sales returns (Spears, 2004). South Africa is highly attractive potential market for multinational corporations such as Nordstrom for a variety of reasons including but not limited to, the increasing fashion scene in Cape Town. High-end brands such as, Christian Louboutin, Burberry, Gucci, Prada, Fendi, Tom Ford, Ralph Lauren are among some of the high-end designer brands that will be represented in South Africa.

Nordstrom’s firmly believes that we will be able to meet the current demand for luxury high-end apparel.  With the development of Africa, the South African retail market is expected to grow significantly over the next 3-7 years. This can be attributed to an increase in personal income and a growth in the national economy. By the expanding middle class along with increased digital connectivity, the growth ceiling will be uncapped. We are projecting in the coming fiscal year a growth factor of 10% for the stores who participate in e-commerce. Financial data compiled suggests that online retail sales are developing at the rate of 31 percent year-over-year to reach 32.70 billion USD in 2018 (Farfan, 2018).  Expanding into South Africa would guarantee the company global success and brand recognition as one of the top the fashion retailers who have crossed continents by diversifying into the most expanding continent.

While the investment project correlates to fill a void in an up and coming country, the project contains significant risks both internal and external that due diligence must be applied to ensure success. Internal risks tend to be more easily identifiable; they involve infrastructure problems or other administrative issues (Tyson, n.d).  Meanwhile, the external risks are not as easy to identify, as they are outside of the control of the company or the project team. Some examples of the external risks would be economic downturns, supplier bankruptcies or unforeseen natural events and war. (Tyson, n.d).  The proposed expansion would ensure that Nordstrom would become an international retailer in the high-end fashion industry. 

Internal Risks

Expansion into South Africa the company will be faced with a host of internal risks that would need to be thoroughly examined prior to proceeding. One of the bigger hurdles is continuity in training sales associates, employment practices and human resources policy and procedure.  The current corporate policy at Nordstrom is the implementation to provide outstanding customer service to every customer (Farfan, 2018). Due to cultural differences and the underlying remainder of Apartheid, racial segregation that policy that dictated associations between South Africa’s white minority and nonwhite majority and sanctioned racial segregation and political and economic discrimination against nonwhites. The implementation of apartheid is also termed “separate development” since the 1960s, this action was made possible through the Population Registration Act of 1950. (Encyclopedia Britannica ) Nordstrom’s will be faced with battling consumer equality and social norms surrounding customer service and equality based on race. Moreover, the training for South African employees is likely to last longer than usual due to cultural differences (Farfan, 2018). Although English is widely spoken in South Africa, in varying degrees, but most prominently in the cities. Cape Town, Bloemfontein, Durban, and Pretoria. There are officially 11 languages that are recognized; Afrikaans, English, Ndebele, Northern Sotho (or Sepedi), Sotho, Swazi, Tswana, Tsonga, Venda, Xhosa, and Zulu. Afrikaans and English are West Germanic languages. Ndebele, Swazi, Xhosa, and Zulu belong to the Nguni group of languages, whilst Sepedi, Sotho, and Tswana belong to the Sotho-Tswana language group.  The most spoken first languages are Zulu(23%), Xhosa(16%), Afrikaans(14%) and English(10%). Most South Africans speak at least two languages, with English being the general lingua franca. English is not regarded as a native or indigenous language, but Afrikaan is, as it developed from 17th century Dutch. The other 9 languages are all indigenous. ("Languages of South Africa" n.d.).  The hiring process will need to ensure that employees are proficient in English and at minimum one or more of the native languages, as all written communication with the corporate offices are drafted in English.  The unspoken uniform of a Nordstrom employee is high-end business attire.  For the expansion project, uniforms will be company issued for both male and female employees so that as a corporate brand we are mindful of the cultural etiquette of the country.  Christianity is a major religion and most women and men dress in attire similar to the US and Canada. However due to America being more socially open and excepting of transgender concepts Nordstrom’s needs to have buyers that are aware of the social norms in America vs South Africa when purchasing content for the South African retail stores.  The team would need to follow local culture and ethics in order to successfully and correctly assess all of the potential issues (Marenin, 2014). 

Technology can be identified as another significant internal risk since a third of the company’s sales are derived from e-commerce transactions. It is critical to develop a cyber-system that will protect the company from software failure, identity theft viruses, and fraud, both internal and external, as well as human error that could be associated with a lack of training or unfamiliarity with the systems most commonly used.  While these instances have affected all retailers, they have been proven to decrease sales and consumer loyalty. If patrons feel unsafe using an online platform they are less likely to shop, thus affecting the revenue. Nordstrom’s must be proactive and take the steps to build a cyber-infrastructure that address these concerns and hire staff that has sufficient training in place to recognize the threats prior to going live.    

The aforementioned internal risks have a noteworthy impact on Nordstrom’s financial indicators, each potential threat and training obstacle must be properly vetted for success in global expansion. Similarly, the company needs to uphold its culture and values and spread it to the new country.

External Risks

External risks refer to the ideas that Nordstrom has no control over. In South Africa, a significant number of such risks can be identified. One of the problems would be the recent announcement regarding taking away the land from the farmers in the country to redistribute it to the black population of the country. While not directly affecting the urban populations, such a move could have significant effects on the reliability of South Africa as a host nation for the investors. It is important for the country to be able to undergo changes, but it also needs to be able to adapt to modern realities.

            The country has also been flooded with political scandals embedded with corruption. In order to overcome the corruption issues, the country needs to strengthen its democratic process and take steps to break down the racial tensions between blacks and whites. Finally, the trade war between China and the US could have an effect on the way South Africa can handle its trade; because it is essential for South Africa to trade with both the US and China in order to move forward, otherwise, it may risk high inflation rates. Infrastructure remains at the top of the list for external factors, while the South African economy is growing rapidly, the government has been unable to generate enough opportunities in terms of the public infrastructure growth and many of the citizens in inner cities are presented with a difficult task communing to larger cities where work is often located.  More importantly, a weakened infrastructure poses a challenge for importing foreign goods from discounted suppliers abroad.  It has been declared that the South African economy will grow at least 15% by 2025 (Ballard, 2015).   

All of the mentioned external factors need to be taken into account to guarantee that Nordstrom will be ready for the entry in the global market. For the external factors, it is especially important to be able to prepare for the potential dangers of each scenario. This would allow the company to better understand the newly entered market and set itself up for further success. 

Microeconomics

One of the key reasons for Nordstrom attempting to enter the South African market is the expansion of both foreign and domestic competitors that have elected to expand into Cape Town South Africa. Due to the explosion of the fashion seen in highly populated cities, there is now a large market for high-end brands. The smaller local companies that provide apparel will still be an available option for those customers that do not have a need for corporate or formal dress attire. Nordstrom’s expansion to South Africa creates a competitive atmosphere with other retailers that cater to mid to upper-level income groups levels because of the ability to provide merchandise that has a lower price point with a variety of options in terms of style and size. Nordstrom bouts this market with a more competitive price that is higher than local retailers, but still is affordable; with the introduction of Nordstrom Rack which consists of the prior year’s season. Nordstrom Rack will offer designer brands that are between 50 to 70 percent off the ticketed price of the current season. Affordability will be the key to marketing at a price point the South African consumers can afford. Since the demand exists, Nordstrom has the chance to enter the market before others or even the local producers. Even though the rural areas of South Africa may not appear valuable for the company, its major cities have grown significantly and have created a demand for the luxury branded products in the categories of fashion, accessories, and cosmetics (Ballard, 2015)

The profit margins can be significantly affected by the price elasticity of demand. Price elasticity implies that South African consumers are more likely to buy the products if they are cheaper. However, the luxury goods sold in Nordstrom stores, the price elasticity may be different, as designer labels are usually not affected by cost. Consumer behavior patterns of apparel markets abroad suggest that consumers in retail markets are associated with lower prices and high demand vs higher prices, which creates a lower demand for a product (Gallo, 2015). This is because the consumers may not wish to purchase high-end clothing that has designer labels if it is at a lower price point (Gallo, 2015). Price elasticity can be considered in terms of the availability of products that remains after the season is over, where merchandise is often discounted. The profit margins are significantly affected by the price elasticity of demand.

Alternative Financial Scenarios

The expansion into South Africa would cost approximately 20 million US dollars. Illustrated in (Table 1) are projected financial performance changes if sales were to fall 20 percent short of initial assumptions. In this scenario, Nordstrom would experience a decrease of 3,096 million in 2018, 3,172 million in 2019, and 3,282 million in 2020. That represents a total of 9,550 million in 3 years. This table represents a significant decrease in revenue that would need to be closely monitored to determine if international concentration would be a worthy investment. In such scenarios, the company would have to consider reducing expenses to avoid liquidation and a forced exit of the market. Closing out the stores that generated the least amount of revenue would be the best resolution. Another option would be to limit the operating expenses for overseas divisions, until a profit margin of at minimum breakeven is declared. Decrease in company sales can be attributed to many factors such as external or internal risks as well as the timing window of the current economy. (See Table 1)

In table 2, Nordstrom would experience the rise of 3,149 million in 2018, 3,275 million in 2019, and 3,400 million in 2020. Thus, there would be a reverse scenario leading to an increase in sales by a total of 9,824 million over the course of three years. Such results would indicate a positive revenue stream from the expansion and the growth due to the entrance in South African market.

This type of expansion can be used to significantly improve the potential of the company on African continent. Given that the population of South Africa is higher than Canada, the company could open more stores in South Africa than it currently operates in Canada. Currently there are three Nordstrom full-line stores in Canada. (Nordstrom Inc. n.d.) If the company purchases the locations in the primary locations within South Africa it could also increase the net profit over the long term. After gaining momentum, Nordstrom’s could possibly feature designers that are exclusive to the Cape Town location and provide a platform for the brands to sell in the US brick and mortar stores. (Table 2)

Time Value of Money

The time value of money identifies the way the value of money is likely to change over time for the company. It should take into account not only the inflation rate, but also the potential opportunity costs available for the company and the product. Table 3 indicates the initial investment, operating incomes over the three years as well as the NPV & IRR. NPV for the year of the decrease of sales by 20 percent was the lowest at $1927.85. Such a performance would prompt the shareholders to find other strategies and seek for the alternatives. On the other hand, a 20 percent increase in sales would provide an NPV of $2891.75 for Nordstrom. Such a positive performance is likely to provide boost for the investors willing to invest in similar projects. The IRR would be 1.76 with high performance when sales are performing well and a low of 1.23 otherwise. The payback period at a performance of 2 percent or higher will be about 1.5 years. However, if sales are performing at negative 20 percent, the payback period will be approximately 4.5 years.

Table 1: Potential 20% Decrease in sales

Table 2: 20% Increase in sales

Table 3:

References:

Ballard, R. (2015). Black Middle Class In South Africa (“Black Diamonds”). In The Wiley Blackwell Encyclopedia Of Race, Ethnicity, And Nationalism (Eds A. D. Smith, X. Hou, J. Stone, R. Dennis And P. Rizova).

Farfan, B. (2018) Department Store Mission Statements. Retrieved from https://www.thebalancesmb.com/department-store-mission-statements-4068552

Gallo, A. (2015) A Refresher on Price Elasticity. Retrieved from https://hbr.org/2015/08/a-refresher-on-price-elasticity

Marenin, O. (2014), Styles Of Policing And Economic Development In African States, Wind Energ., 34, 149– 161

Nordstrom (2017). 2016 annual report of Nordstrom. – Retrieved from: https://investor.nordstrom.com/financial-information/annual-reports

Nordstrom (2018). 2017 annual report of Nordstrom. – Retrieved from: https://investor.nordstrom.com/financial-information/annual-reports

Nordstrom (2019). 2018 annual report of Nordstrom. – Retrieved from: https://investor.nordstrom.com/financial-information/annual-reports

Nordstrom, Inc.|Company Profile. (n.d.). Retrieved April 20, 2019, from http://www.vault.com/company-profiles/retail/nordstrom,-inc/company-overview.aspx

Spears, D. (2004). Nordström's Original Vision. Art On Paper, 8(4), 54-57.

Tyson, B. (n.d) Identify Internal vs. External Risks in Project Management. Retrieved from https://www.brighthubpm.com/risk-management/94946-internal-vs-external-risks-in-project-management/

Projected Investment-20%20%

Rate6%6%6%

Investment (million)-202020

2018905.51$ 724.41$ 1,086.61$

2019921.20$ 736.96$ 1,105.44$

2020876.20$ 700.96$ 1,051.44$

NPV$2,409.79$1,927.84$2,891.75

IRR1.47%1.18%1.76%

201620172018-20%2019-20%2020-20%

Revenue14,440.00$ 14,760.00$ 15,480.48$ 12,384.38$ 15,860.00$ 12,688.00$ 16,410.00$ 13,128.00$

Cost of Sales(9,170.00)$ (9,440.00)$ (9,890.00)$ (7,912.00)$ (10,160.00)$ (8,128.00)$ (10,520.00)$ (8,416.00)$

Gross Profit5,270.00$ 5,320.00$ 5,590.48$ 4,472.38$ 5,700.00$ 4,560.00$ 5,890.00$ 4,712.00$

Operating Expenses(4,120.00)$ (4,330.00)$ (4,684.97)$ (3,747.98)$ (4,800.00)$ (3,840.00)$ (5,035.00)$ (4,028.00)$

Operating Profit1,150.00$ 990.00$ 905.51$ 724.41$ 900.00$ 720.00$ 855.00$ 684.00$

Interest Expense(125.00)$ (122.00)$ (123.00)$ (98.40)$ (119.00)$ (95.20)$ (117.50)$ (94.00)$

Tax Expense(376.00)$ (330.00)$ (353.00)$ (282.40)$ (169.00)$ (135.20)$ (88.50)$ (70.80)$

Net Profit649.00$ 538.00$ 429.51$ 343.61$ 612.00$ 489.60$ 649.00$ 519.20$

Profit Margin4.49%3.64%2.77%2.77%3.86%3.86%3.95%3.95%

20162017201820%201920%202020%

Revenue14,440.00$ 14,760.00$ 15,480.48$ 18,576.58$ 15,860.00$ 19,032.00$ 16,410.00$ 19,692.00$

Cost of Sales(9,170.00)$ (9,440.00)$ (9,890.00)$ (11,868.00)$ (10,160.00)$ (12,192.00)$ (10,520.00)$ (12,624.00)$

Gross Profit5,270.00$ 5,320.00$ 5,590.48$ 6,708.58$ 5,700.00$ 6,840.00$ 5,890.00$ 7,068.00$

Operating Expenses(4,120.00)$ (4,330.00)$ (4,684.97)$ (5,621.96)$ (4,800.00)$ (5,760.00)$ (5,035.00)$ (6,042.00)$

Operating Profit1,150.00$ 990.00$ 905.51$ 1,086.61$ 900.00$ 1,080.00$ 855.00$ 1,026.00$

Interest Expense(125.00)$ (122.00)$ (123.00)$ (147.60)$ (119.00)$ (142.80)$ (117.50)$ (141.00)$

Tax Expense(376.00)$ (330.00)$ (353.00)$ (423.60)$ (169.00)$ (202.80)$ (88.50)$ (106.20)$

Net Profit649.00$ 538.00$ 429.51$ 515.41$ 612.00$ 734.40$ 649.00$ 778.80$

Profit Margin4.49%3.64%2.77%2.77%3.86%3.86%3.95%3.95%

Milestone Two: Risks

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Nordstrom, Inc.

1

6

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1

Milestone

2

: Risks

Module Six

NORDSTROM

EXPANSION

INTO SOUTH AFRICA

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RISKS

Carmen Hendrickson

Milestone Two: Risks- Nordstrom, Inc. 1

6-1 Milestone 2: Risks

Module Six

NORDSTROM EXPANSION INTO SOUTH AFRICA- RISKS

Carmen Hendrickson