the creation of an external capital funding proposal.

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EXTERNAL CAPITAL FUNDING PROPOSAL

MBA 640 External Capital Funding Proposal Description & Justification : Nordstrom Inc. Your paper started well with good research and detail, but then it really provided limited discussion that did not address some sections in any discernible depth or specificity. Please see my comments within your paper. Do not hesitate to contact me with questions. Carmen Hendrickson 04/07/2019

Contents 1. Investment Project 3 1.1. Description of Investment Project 3 1.2. Required Resources 4 1.3. Timeframe 5 2. Justification 6 2.1. Timing 6 2.2. Strategic Fit 8 3. References 11

Investment Project

Description of Investment Project

The investment project plan is for Nordstrom Inc to enter the South African market and open a department store in Cape Town South Africa with plans to expand into Johannesburg. Currently, the company operates only in the North American market, which is highly saturated (Rupp, et al., 2018). Currently due to North American market saturation, online shopping and competition, Nordstrom’s is downsizing at approximately two more stores than it is opening every year (Nordstrom.com, 2018). Because of the downsizing, it is critical for Nordstrom Inc to break into untapped markets that have an unsaturated market and the demand for high-end designer fashion and cosmetics, thus providing the opportunity to open stores and generate revenue.

Several factors influenced the decision to choose South Africa as the destination for the stores. The country is also English-speaking, guaranteeing that it will be easy to train personnel (Fedderke, Mengisteab, 2017). Furthermore, the country has major financial center cities including Cape Town, known as the fashion capital of Africa. The continent lacks luxury fashion stores due to it being the most underdeveloped continent. However, Given the current rates of GDP growth, Africa is likely to soon start purchasing many foreign goods. Hence, South Africa could be the start of Nordstrom expansion across the entire Africa, where fashion and economy are growing at a rate that is incomparable in other regions where English is a language that is spoken. (Mudronova, Isaacs, 2018).

South Africa recently, in 2010 became a member of the BRICS (RICS is the acronym created for an association of five major emerging national economies: Brazil, Russia, India, China and South Africa) Countries that belong to this group are recognized for their influence on regional and global affairs, and South Africa hosed the 2018 summit in July( Investopida ).  South Africa, over the last 20 years has had a steady increase of sharp economic development. It has become the financial center of the continent, due to its resources and location. Many of the western apparel and cosmetic companies have locations in South Africa, such as Nike, Reebok, Levis, Revlon , Este Lauder and Elizabeth Arden are among some of the major brands that currently have products featured in Nordstrom’s other locations. These companies also house large offices and factories located in major cities that are highly developed including Cape Town, Praetoria, Johannesburg and others (PMA Research, 2017). The factories are currently producing goods for outsourcing to the United States and other countries. All these locations could severe as a viable host for Nordstrom stores. It may have been risky to invest in the country previously due to racial tensions, but given the rise of African economy, it appears to be the right time to invest in future success.

At the same time, African continent can be the most vulnerable in the case of economic downturn around the world (White, et al., 2019). The main reason for this would be the lack of strong financial structures across the continent and the country. Hence, Nordstrom also requires a plan for evaluation of success over a long period. The best way to measure success in this case would be the generated revenues. This is because the first few stores are likely to serve as basis for aggressive expansion around the rest of the country and the continent (Alexander, Mason, 2017). If the revenues do not meet the expected values after three years, the South African venture could be considered a failure. CFO Anne Bramman of Nordstrom’s plan for measuring success has been already proven in the United States. Bramman correlates success by integration of web, catalog and brick and mortar stores. “By having combined digital and physical assets in a given market… In our full-price business, we have a high-quality portfolio of around 120 full-line stores in roughly 50 markets across the U.S. In these markets, the profit per customer is more than double that of markets without a Nordstrom store presence.” (Lauchlan, 2018), The opening of a Nordstrom’s store in South Africa will fill the void of stores that are closing in the United States and tap into an unchartered market in a country that is on the rise globally with a need and desire for high-end fashion and cosmetics. The measuring of the stores success will be tracked and compare against sales from flagship stores in the United States. While South Africa economy is much weaker than that of the U.S, revenue and attainment will be gauged by using profit investment ratio (PIR) greater than 1.3 for the first 5 years. Anything less will be revaluated to minimize risk.

Required Resources

Nordstrom stated its growth slowly, first as a shoe store, which then later morphed into the largest independent shoe store in the United States in the 1960’s. (Nordstrom History).Nordstrom’s has a known history for breaking into untapped markets and turning a profit. In 1963, the company purchased Seattle’s Best’s Apparel and entered the market of high end women’s clothing. (Nordstrom History). In 1971, the Company went public officially under the name Nordstrom Inc. and “two years later, annual sales surpassed $100 million, and was renowned as the largest-volume fashion specialty store on the West Coast” (Nordstrom History) Following this map of success Nordstrom company would need to obtain suitable locations for the stores. The first store is slated to open in Cape Town, the unofficial fashion capital of South Africa. Nordstrom stores are strategically located in highly populated industrial sites that have a developed economy and in areas that are easily assessable. Given the current property prices in Cape Town of up to 1,000 USD per square meter, the company would be in a better position if they were to lease a spaces vs purchasing an undeveloped piece of land and building a store. The store should be that of a smaller stature such as a Nordstrom’s Rack that offers clothing at a discounted price and is from a previous season. Leasing would be the safer option in the long run, in case company does not see the revenues from the smaller store (Williams, et al., 2015; White, et al., 2019).

Since the properties are likely to be relatively larger than many of the current stores in the area, it will require government approval. However, the government has been recently trying to encourage foreign businesses to invest in South Africa and as a result; the approval should happen relatively easily (Mudronova, Isaacs, 2018). South Africa also has incentives for foreign businesses, which can be used to further lower the cost of entry in the country (Investsa.gov.za, 2019).

Employees are yet another resource that needs to be considered. One of the major advantages for Nordstrom is that there are major retailers that are already doing well in the area, by networking and incentivizing the company will be able to fill staffing positions easily. Additionally stores that have closed in the states would be able to send employees that otherwise would be out of work from North America to South Africa. Such a mission would provide the company an opportunity to train the new employees at the level of the North American counterparts. Given that South Africa is an excellent tourist destination, the company needs to guarantee same quality of service at every location around the world (Rupp, et al., 2018). At the same time, South Africa provides an excellent talent pool, which could be used by Nordstrom in the future to recruit some of the top management for company headquarters in Seattle to diversify the portfolio as time persists. The South Africa Store will need to recruit 10-15 Store Managers that are able to speak English and able to attend and complete and extensive 2-4 month training program to familiarize themselves with the products and company culture.

Finally, the new expansion proposal will come with a cost, although the cost of labor and rent are significantly less than North American countries, the allocation of funds is estimated that it would cost 550 million in capital over the course of 5 years. The risk is rather small compared to the potential gain of double the investment. It is expected that the profit margin would be higher than that of the states as South Africa has lower wages and looser employment laws that require less insurance and benefits to employees. As a result, Nordstrom is likely to have significant advantage over the local competitors in the country (Nordstrom.com, 2018; van Rens, 2016).

Timeframe

Nordstrom competes in terms of the quality of its products. For this reason, it is necessary for the company to set the stores up well before they are opened (PMA Research, 2017). However, the stores are rarely taller than five floors. Consequently, building a store should not take more than a year. On the other hand, if a suitable lease is found in downtown Cape Town, it would be advised to open the store November/December 2019. This is the time when the country attracts significant number of tourists given the winter in Northern hemisphere (Investsa.gov.za, 2019).

The other important tasks within this timeframe would be recruiting suitable employees and supplying the stores. Normally, six months is considered a huge timeframe for training the employees. Hence, it is a suitable possibility (PMA Research, 2017). Supplies should also not take a long time, if they travel from the US to South Africa even through the sea.

The company must also have metrics for the exit if the new stores fail to attract the South African consumer. The main metric in this regard should be the obtained revenues from the stores. Thus, three years of failing to meet the revenue targets should be the benchmark to implement the exit plan. .

Justification

Timing

There is no time like the present! With stores closing in the United States, South Africa can fill the void. Cape Town has one of the of fastest growing economies, and is one of the larger cities that is able to provide sufficient demand for Nordstrom products. The country has excellent economic communication with the western world including the United States, and in terms of the trade regulations. Several cosmetic products and high-end brands are manufactured in South Africa, thus avoiding the import tariffs (up to 34%) for goods made in the US according to export.gov (2019). However, for the brands that are not produced into South Africa, the company would need to seek out incentives that reduce or waive the fees in exchange for increasing economy and commerce. Since such precedent already exists for a number of Chinese firms doing business in South Africa that would be less of a concern. (PMA Research, 2017).

Another macroeconomic idea that should be considered would be the currency of the country. South African Rand has been a relatively stable currency for years. Given that the country is highly likely to develop production in the future, the value of the currency can be expected to rise over the coming years (White et al., 2019).

South Africa has had a recent boom in terms of foreign direct investment because of the rising prices of commodities. The country has large mineral resources and many international companies operate the mines. At the same time, Chinese companies have been trying to invest across Africa including South Africa as a way to expand their reach as the Chinese market gets more saturated. As an example, Alibaba already works with many local suppliers to provide deliveries of various goods around the world. More investment is likely to come from China, since Chinese economy is slowing and the companies are seeking for higher returns elsewhere (Mudronova, Isaacs, 2018).

Interest rates in South Africa are rather high at approximately 7%. This is because of the relative instability of the market compared to the western world. Moreover, the inflation rate is also high in the country, which gives Nordstrom the advantage of high demand, unlike in the United States, where the low inflation rates are said to be causing lower demand (Rupp et al., 2018).

In general, African continent is the poorest around the world. However, with a rapidly rising population and the highest urbanization rates around the world, the continent is soon likely to become a center of rapid economic development. South Africa holds an excellent position in this sense, due to the fact that the country is one of the most developed among African nations (PMA Research, 2017). As a result, it is already attracting the most talented individuals from across the continent. Hence, entering the South African market also implies approaching the entire African market, where Nordstrom could expand aggressively in the future (PMA Research, 2017).

Strategic Fit

South Africa is a great strategic fit for Nordstrom, as it is no longer able to aggressively expand in the North American market. One of the organizational priorities for Nordstrom has always been constant expansion and improvements of the locations. South African market provides an excellent opportunity of establishing a center in the fastest growing continent (UN, 2017). Due to rapidly growing population, Africa has already become a source of low-skilled labor for many developed nations. However, South African economy is also standing high and able to generate sufficient demand for Nordstrom services (Alexander, Mason, 2017).

Financially, the company would have the aim of obtaining high revenues. Nordstrom would be unlikely to generate any profit from the South African venture for a number of years due to the high fixed costs of initial expansion. However, given the positive cash flows, the fixed costs of expanding into more cities in South Africa as well as further destinations in nearby countries would decrease considerably. Consequently, it could be considered a higher financial priority to generate positive cash flows than profit (White, et al, 2019).

South African retail environment has been growing rapidly over the past decade at a rate of approximately 4% a year. The rise is likely to continue as the country’s industry takes off. Moreover, the online retail boom allowing the local producers to use low value of the South African Rand has allowed the sales to grow further (Fedderke, Mengisteab, 2017). There are currently more than 10 cities in South Africa with a population of over 700,000 people (Investsa.gov.za, 2019). These cities provide excellent destination for the Nordstrom stores, especially in the downtown areas.

Retail sector is already attracting many luxury brands with some of the most common brands such as GAP and H&M. Notably, the largest part of the population are the youngest and given the high numbers of children, the number of consumers for the goods is only likely to rise. The household incomes are also growing and most of it is likely to be spent on retail (PMA Research, 2017).

South Africa has huge unmet demand. The country has higher population numbers than absolute majority of the European nations, but it has been unable to attract many foreign businesses due to its location. Moreover, the investors have been hesitant to invest in the country other than extracting the natural minerals (Williams, et al., 2015). The reason for this may be the long-term relationship of South African government with the mining corporations (Alexander, Mason, 2017). Luxury retail is a relatively new market for South Africa and not as highly regulated or sought after.

Nevertheless, South Africa has English among its official languages meaning that the company would be able to spread its expertise rapidly. Local staff would be able to provide necessary regional expertise for further expansion. Due to the availability of Chinese businesses across Africa, it will be easy to find the suppliers of the goods. Many Chinese companies deliver freight to the ports of South Africa, since China purchases significant part of the minerals extracted from South Africa. Therefore, supplying Nordstrom stores with goods should be possible with these means (White, et al., 2019).

Finally, the organizational structure of the company after the expansion should also be considered. Nordstrom would most likely have to set up a whole new division to deal with the matters in South Africa. As the number of stores in the country and across the continent grow, it will be possible to track the success of the division.

References

Alexander, B. & Mason, R. (2017), The South African E‐Retail Change Agenda: A Curriculum Development Perspective. The Electronic Journal Of Information Systems In Developing Countries, 82: 1-21.

Export.Gov, (2019), South Africa – Import Tariffs – Available At: Https://Www.Export.Gov/Article?Id=South-Africa-Import-Tariffs

Fedderke, J. W. And Mengisteab, D. K. (2017), Estimating South Africa's Output Gap And Potential Growth Rate. South African Journal Of Economics, 85: 161-177.

Investsa.Gov.Za (2019), 10 Reasons To Invest In South Africa – Available At: Http://Www.Investsa.Gov.Za/Whysouthafrica/

Lauchlan, S., & Lauchlan, S. (2018, March 05). The integration imperative at Nordstrom - striking the omni-channel balance. Retrieved April 7, 2019, from https://diginomica.com/integration-imperative-nordstrom-striking-omni-channel-balance

Mudronova, J., & Isaacs, G. (2018). A National Minimum Wage In South Africa: A Tool To Reduce Inequality? In Khadiagala G., Mosoetsa S., Pillay D., & Southall R. (Eds.), New South African Review 6: The Crisis Of Inequality (Pp. 43-65). Johannesburg: Wits University Press.

Nordstrom.Com (2018), Investor Relations – Available At: Https://Investor.Nordstrom.Com/Financial-Information/Annual-Reports

Pma Research (2017), Competition Increases In South African Retail Environment – Available At: Https://Www.Pma.Com/Content/Articles/2017/03/Competition-Increases-In-South-African-Retail-Environment

Rupp, L. Whiteaker, C. Townsend, M. Bhasin, K. (2018), The Death Of Clothing, Bloomberg – Available At: Https://Www.Bloomberg.Com/Graphics/2018-Death-Of-Clothing/

Un, (2017), World Population Prospects, Key Findings And Advance Tables, Department Of Economic And Social Affairs.

Van Rens, T. (2016), Paying Skilled Workers More Would Create More Skilled Workers, Harvard Business Review – Available At: Https://Hbr.Org/2016/05/Paying-Skilled-Workers-More-Would-Create-More-Skilled-Workers

White, L, Kitimbo, A, Rees, L. (2019), Institutions And The Location Strategies Of South African Firms In Africa. Thunderbird International Business Review. 61: 61– 73.

Williams, J., Henderson, G., Evett, S., & Hakstian, A. (2015). Racial Discrimination In Retail Settings: A Liberation Psychology Perspective. In Bay M. & Fabian A. (Eds.), Race And Retail: Consumption Across The Color Line (Pp. 263-277). Rutgers University Press.

1

EXTERNAL CAPITAL FUNDING PROPOSAL

MBA 6

40

External Capital Funding Proposal

Description & Justification

: Nordstrom Inc.

Your pape

r started well with good research and detail, but then it really provided limited

discussion that did not address some sections in any discernible depth or specificity.

Please see my comments within your paper.

Do not hesitate to contact me with ques

tions.

Carmen Hendrickson

04

/

07

/2019

1

EXTERNAL CAPITAL FUNDING PROPOSAL

MBA 640

External Capital Funding Proposal Description & Justification : Nordstrom Inc.

Your paper started well with good research and detail, but then it really provided limited

discussion that did not address some sections in any discernible depth or specificity.

Please see my comments within your paper.

Do not hesitate to contact me with questions.

Carmen Hendrickson

04/07/2019