1

Introduction

The theory of comparative advantage, in international business, is a situation in which a
company is able to produce goods at a relatively low marginal and opportunity cost over
another company (Costinot, 2009). Primark can be said to have a comparative
advantage as it produces stylish clothes in large quantities and at lower costs than
many other clothing companies in the industry. In a market like France- the home of
high fashion, the average French consumer cannot afford to buy the expensive clothes
that France has to offer (Knowles, 2012).

Primarks motivation for entering Marseille

In the year 2012 the demand for high fashion in France kept falling. This decline raised
the demand for lower priced clothing that still maintains a sense of fashion. France is
usually overlooked as a sales base. This is due to the fact that emerging markets are
attracting apparel brands that are aiming to continue international expansion. However,
opening a clothing store in France is important for improving a companys brand image
due to the countrys association with high fashion (Kunde, 2013).
Sales of specialist fashion retailers in France fell to 39billion in the year 2011. There is
also a 1% annual reduction in the specialist retail market (Euromonitor, 2012).
It is clear that the decline in the sale of costly clothing was an indicator for Primark to
move into Marseille in order for it to have a comparative advantage from its fashionable
low-cost clothing. The falling demand for high fashion is in correlation with prices as
changes along the demand curve can be influenced by the level of consumer incomes
amongst other factors (Ben-Porath, 1967). If consumers are not able to satisfy their
unlimited wants due to income restraints, they will look for a substitute good and
Primark, being aware of this, decided to venture into France.




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Why location matters

The location of a business is important in order to increase marketability. If the location
of the store is in a place where there is little or no demand for the good, or where many
consumers are unable to access it, the business can fail. The competitors in the specific
area also need to be considered. If the competitors are offering better prices, for their
goods, then the new entrant will suffer if it is not able to further reduce prices due to
high operating cost- which can also be influenced by location if the rent/land is costly
(Hamel, n.d.).

Due to Primarks closeness to its consumers by entering into Marseille, the profits
increased by 44% which is about 514 million, and closer investigation has shown that
the rise in profits is an ongoing trend for the company (Leterrier, 2013).
Because Primark is able to meet the demand from its French consumers, by offering
them value for money, it is making high profits. As its profitability increases, the
company will be further able to increase the quality of its products which will bring about
a more secure loyalty for its clothing. France also has a strong banking setup and low
interest rates (Deloitte, n.d.) which make it an attractive market to venture into.

Advantages of expansion:
Creates brand awareness: Primark saves on advertising by relying on the loyalty
of its customers. By entering Marseille and opening in Grand Littoral where
tourists can easily access it, more people will become aware of the brand which
will further increase its popularity (Interbrand, 2014).

Low barriers to entry: H&M and Zaras success in France was an indicator to
Primark that it could also have a chance of increasing profits by entering the
same market (Neilan, 2013)

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Large volume sales: In entering a large shopping mall in Marseille, Primark is
able to sell larger amounts than its competitors earning more by volume than by
margin (Anonymous, 2012).

Economies of scale: This is where the increase in the size of a firm leads to a
decrease in average cost (Helpman, 1981). In expanding, Primark is able to
increase market share and further reduce the prices of its products which
reinforces increased buying from consumers, and brings about higher profits.

New labor: Primark created about 300 new jobs from expanding; new workers
will bring in new ideas to further improve the business and help streamline
processes (Johnson, 2014).

Disadvantages of expansion:
Less control: As expansion increases it is more difficult for the chief executive to
keep track of all the activities involved within the business especially as the
business tends to take a different turn from the chief executives initial plans.

Increase in labor: Although job creation is listed as an advantage above, it can
also be a disadvantage. With the increase in employments, there can be decline
of craftsmanship on the job, and operating cost could increase due to the large
number of workers that need to be paid.

Lower quality: Expansion can lead to lower quality. Although Primark is not a
high quality brand, the fact that it initially produces in mass volumes- coupled
with expansion- can further reduce the appeal of its clothing due to mass
production

(Heibutzki, n.d.)

4


Primarks entry mode into Marseille

A schematic representation of entry choice factors:
















(Agarwal, 1990)


Primarks entry into Marseille is a foreign direct investment. As previously mentioned,
the company opened up a store at the Grand Littoral commercial center, which is one of
the largest malls in that area. Primark did not acquire any business in order to enter
Marseille, nor did it use the method of licensing or creating a joint venture etc; which are
some of the various entry modes that companies use to transition into a new market-as
portrayed above- in order to help reduce the risk of business failure.


Ownership advantages
Firm size
Multinational experience
Ability to develop
differentiated products

Location Advantages
Market Potential
Investment risk
Internalization
Advantages
Contractual risk
Choice of entry mode
No involvement
Exporting
Joint venture
Sole venture
Licensing
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In general, although expanding can lead to less control, entering a new market
specifically through a direct entry aids the company in retaining control over its
business. It entails transferring resources as well as involving the proper management
of them, and it helps the company increase the relationship it has with its customers due
to proximity (Lpez-Duarte & Vidal-Surez, 2010). Furthermore, it increases the
companys knowledge of the ongoing competition in the new environment. The success
of this method of entry is also dependent on commitment (Moran, 2012).

Some of the factors that further aid the positive result of direct investment include: high
cultural distance-as expectations to cooperate are low- possibility of high sales/low risks
in the economic environment, and low risks in the political environment (Slangen, 2009).
Primarks entry mode into Marseille is also in order for the company to retain its profits
from the French market without having to share them, as it would if it had used a
different strategy such as a joint venture. They entered the market in a timely manner
just when the French economy was in need of more jobs and suffering from lower
wages as portrayed in the Phillips curve:

Inflation
Rate (%)







Unemployment rate

(Phillips, 1958); Drawn by Author

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The entry mode can also be seen as a wholly owned subsidiary, specifically: a green
field investment. Primarks high capabilities make it more suitable to use a wholly owned
subsidiary-which involves opening a new business/store in the foreign country.

More determinants of the entry mode chosen by a firm:
Companies that are specific in what they produce with no need to rely on close
substitutes are more likely to use wholly owned subsidiary method (Chiao et al.,
2010).
Companies that are experienced in expanding in foreign markets will also use
this method as they have a lot of knowledge about it (Meyer, 2001).
To safeguard knowledge-based assets, and when the company has the
resources in order to compete, wholly owned subsidiary method is used (Martin
& Salomon 2003).
Distribution of modes of entry by industrial sector:

(Kogut & Singh, 1988)
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Theories on entry mode:
According to the transaction cost theory, companies should make use of the most
beneficial kind of entry mode in order to maintain low transaction cost and lower
commitment to resources when operating abroad. A wholly owned subsidiary could
lower transaction costs by reducing threats from competing firms (Brouthers et al.,
2000).
Resource-based theory suggests that a company should choose the entry mode that
can enable it to exploit its current resources or gain more resources in the foreign
market, in other words an entry mode that involves high control provides the company
with a way to increase its returns (Sharma and Erramilli, 2004).
From the two theories above, the direct entry mode used by Primark into Marseille is
the best for its welfare due to its size and its need to maintain low costs while making
high returns.

Advantages of direct entry mode
Primark would have control over its supply chain
Offers opportunities for the business to be diverse and able to manage risks such
as fluctuations in the market
Protects the companys trade secrets and other confidential information
Improves foreign market know-how as Primark will have high control over its
operations in Marseille
Familiarity with customers, from dealing directly with them which will enable
being able to cater to their changes in tastes and fashion
Improves business flexibility
Getting around trade barriers
(Hoshino, 2000)


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Advantages to the foreign country:
There will be an increase in GDP leading to economic growth for France
As the level of unemployment falls as portrayed in the Phillips curve above,
Wages will rise. Opening in Marseille created many jobs; therefore this helped
reduce the level of unemployment
(Economywatch, 2010)

Advantages to French populace:
They benefit from low prices
They have direct access to the store especially as Primark does not have an
online store
The unemployment rate reduces with the new creation of jobs, so they are able
to attain positions within the company
(CBRE, 2013)

From the advantages one can see that Primarks entry into Marseille does not benefit
the company alone, but the country and the citizens of France are able to benefit from
this direct entry.

Disadvantages of direct entry mode
The parent company must take responsibility for the total cost of its subsidiary
abroad
There is a high cost involved in setting up a wholly owned subsidiary especially
as Primark is a large enterprise
Risks are much higher i.e. political- which can affect the business welfare

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Exit barriers are high due to the losses that have to be endured by the parent
company if Primark had to exit from Marseille
(Yu & Tang, 2006)

Disadvantages to French populace:
Primark can exploit the countrys resources
Infant industries can suffer from the competition and this can stunt economic
growth in the country
Host country-France- does not benefit enough from investment as profits are
sent to home country of the company
(Mata & Portugal, 2002)

More risks in detail

There are various risk factors associated with a business entering into a foreign country.
These risks differ in intensity depending on the country in question. Political risks could
involve changes in government policies and law, or civil unrest (Delios & Henisz, 2003).
There are also economic risks involved, such as the exchange rate, or level of inflation.
Depending on the exchange rate the company may not make much profit from its
venture into a foreign market (Harrison, 2011).

If the business is ignorant to market fluctuations and market situation in the foreign
country, it can very easily fail as it would not be able to meet high performance
requirements (Bae & Salomon, 2010).
Cultural barriers can affect not only communication but the way the business is
conducted. Employee laws also need to be taken into consideration as well as methods
on how the employees in the foreign country should be treated/trained in order to avoid
complications. Costs in the foreign market also need to be taken into consideration in
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order to secure the market share. Depending on the attractiveness of the market, the
entry mode is selected, if the firm does not take entry mode determinants into
consideration and it uses the wrong entry mode, it could be at a heavy loss (Julian,
2009).

Conclusion with recommendations
Primark is performing successfully in Marseille due to the fact that it entered the market
at the right time and using the right entry mode strategy. It also evaluated the market
potential in France and in doing so, it was able to identify the levels of demand for its
product and predict potential outcomes of moving into Marseille. Although Primarks
calculations where accurate, there are still some disadvantages and risks which the
company could suffer from. However, these are only potential disadvantages and
Primark is not in any immediate danger of them due to its success in the foreign market.
From the findings above any company seeking to venture into a foreign market,
especially if it has little knowledge/experience on how to do so, must determine what
entry mode to use by evaluating the market, the size of the firm, cultural distance,
exchange rates, consumers, barriers to entry, and barriers to exit etc. In doing a
thorough evaluation, the company will be able to select the appropriate entry mode
Into the foreign location which will safe guard it from immediate failure or heavy losses
in the near future. The company must also consider all possible risks of failure and
come up with a contingency plan in order to be well prepared.
However, businesses need to remember that even with a contingency plan, unpredicted
outcomes can occur due to unfamiliarity with host country market or lack of experience
in foreign ventures.