A report analysing the operations of Hugo Boss in Latin America, specifically Mexico.

Executive Summary:

This report analyses the operations of Hugo Boss, a luxury accessories and apparel brand catering to the premium market segment, in Latin America and specifically Mexico. Hugo Boss is headquartered in Metzgin, Germany and is a globally diversified company prevalent in many regions of the world, including Latin America and the Caribbean. While the company bases its production facilities in countries in Asia and Europe, it uses wholly owned subsidiaries and franchising as modes of entry into the Mexican market where it is basically seeking new customers, efficiency of resources and the spreading of risk.

This report outlines the sales trends of Hugo Boss in the Mexican market over the past ten years and mentions statistics of their equity over earnings in the years 2007 and 2008. The effects of job creation and knowledge spill over in the Mexican and Brazilian markets are mentioned while also undertaking an analysis of Hugo Boss’s operations in Mexico compared to other regions.

The company is further analszed through the use of SWOT analysis, PEST analysis and by placing the brands in the BCG grid. The company’s internationalisation strategies are analysed according to the dimensions of modes of entry, extent of globalisation, resource commitment, timing of internationalisation plans, and degree of co-ordination. Lastly, the strategies the company has employed during the global economic recession of 2008-2011 are summarised.

The information contained in this report is limited due to the non-availability and access to specific facts.

Introduction:

Hugo Boss is one of the leading brands catering to the premium and upscale segment of the apparel market and providing luxurious fashion garments to suit the tastes of both men and women alike. The parent company or headquarters of the Hugo Boss Group is based in Metzgin Germany and all centralised decision making and board decisions are conducted herein. As the company is a public limited company and is answerable to its shareholders it operates upon a dual management and control structure, where the Management Board is given the role of managing all company operations and making decisions accordingly and the Supervisory Board holds the responsibility of advising the Management Board and supervising or controlling their activities (Hugo Boss Annual Report, 2010).

The company is prevalent in locations all over the globe and specifically in the three regions of Europe (including the Middle East and Africa), Americas and Asia. Hugo Boss operates a total of 54 consolidated subsidiaries which are responsible for the operations in their own local area and 36 of these 54 subsidiaries are distribution centres. Hugo Boss owns and is thoroughly controlling all of the subsidiaries except for the joint venture that the company has made in order to penetrate the Chinese market. The 54 subsidiaries operated by Hugo Boss include subsidiaries operating in countries such as Mexico within the Latin American region and Brazil within the Caribbean.

The company produces items catering to different consumer segments and tastes. The items produced range from business suits, evening wear, casual wear, helmets for motorcycling purposes, footwear, eyeglasses and sunglasses, accessories, leather items, childrenswear, and not to forget the ever popular Hugo Boss perfumes. These items are all categorised under various Hugo Boss labels which include:

( Hugo Boss Annual Report,2010)

Operations in Latin America:

Hugo Boss is a global apparel designer and is prevalent in nearly all countries on the globe. Major parts of Hugo Boss’s market segment are the Americas which include Central and South America also comprising of Latin America. In the Latin American region, Hugo Boss is widely popular in Mexico and the company owns several subsidiaries in the Mexican market. For the sake of this paper, in order to analyse the Latin American operations of Hugo Boss, the analysis will be somewhat limited to the Mexican and/or Brazilian market (Hugo Boss Annual Report, 2010).

As an expansion strategy, Hugo Boss has two different modes of entering foreign markets. Initially, when the company tries to tap into a new market it aims to partner with multi-brand vendors with local experience and expertise using a franchise agreement. Hence, initially Hugo Boss works with franchisees who work according to Hugo Boss’s requirements in managing the brand in their franchise outlets. Sales are made on a wholesale basis to these vendors who then sell the products to the end consumers. However, when sales reach a critical level and are growing substantially, Hugo Boss seeks to expand in the market and have more control over their brand image by developing their own retail stores in which they directly sell to the end consumer. Their current market presence in the Americas in 2010 can be outlined in the following table (Hugo Boss Annual Report, 2010).

Hugo Boss is constantly aiming to expand into new countries and usually enters new markets to seek new markets for their fashionable products and accessories. The company owns their own retail stores in Mexico and Brazil as sales have reached a substantial size wherein the company would like to have more control over their brand image and grow in these areas by developing their own outlets. In 2010, new stores were added in Mexico and Brazil as their strategy for internationalisation and expansion.

According to Dunning, there are several reasons for a firm to enter new markets. These reasons include market seeking in which the firm seeks to penetrate new markets; resource seeking in which the firm aims to gain access to lower prices for inputs/labour, etc; efficiency seeking in which the firm seeks economies of scale and risk diversification by entering new markets; and strategic asset seeking in which the firm seeks to acquire the assets of technological prowess of the foreign market (Dunning, 1993).

In the case of Hugo Boss, the company is dispersed all over the globe and production facilities are not located in Mexico. Mexico is home to franchise partners and retail outlets of Hugo Boss, hence the company is not focusing upon the latter two initiatives for entering the market which may be efficiency seeking or strategic asset seeking. The company can benefit from lower property prices and lower labour costs in their stores in Mexico, while Mexico also has a large potential market for Hugo Boss. While it has not been explicitly stated in the information available, we can assume that the Mexican and the Brazilian market for that matter are attractive for the reasons of market seeking and resource seeking (Dunnings, 1993).

( Dunning, 1993 & Hugo Boss Annual Report 2010)

This condition applies to both Brazilian and Mexican markets because they supply sufficiently cheap labour and resources while having a large market potential. Moreover, Hugo Boss exists in so many countries and regions of the world that it is automatically spreading its risk and gaining economies of scale, hence making efficiency seeking as one of the motivations for internationalisation. However, the main motivation is penetrating the two markets and market seeking (Hugo Boss Annual Report, 2010).

Foreign Direct Investment Projects and Modes of Entry:

The main internationalisation strategy of Hugo Boss is based upon first gaining knowledge of global markets by collaborating with partners who have local expertise in a franchise or wholesale agreement. Hence, Hugo Boss does not immediately make risky investments or heavy resource commitments in newly tapped markets. The only market that Hugo Boss has tapped into with a joint venture is the Chinese market as the Chinese market had heavy potential and it was essential to partner with a local vendor to penetrate the market. However, when sales reach a considerable amount in all markets, Hugo Boss aims to maximise on profit by investing in their own retail operations. (Hugo Boss Annual Report, 2010).

Hugo Boss initially penetrated the Mexican market through franchise agreements or selling to multi-brand distributors. Later on, Hugo Boss focused upon growing its retail operations as it aimed to maximise its benefit and growth. The company is also currently focusing upon increasing their wholly owned subsidiaries and improving their online retail business in all countries. The same strategy was adopted in the Brazilian market (Dimitratos, 2004).

One of the most important and obvious impacts upon host economies of this investment was job creation, as foreign investment does create new job opportunities for any host country. Since Hugo Boss does not own any production facilities in Mexico, knowledge spillover effects may have been minimal. Since there is no clear evidence as to the exact effects that Hugo Boss may have had upon the Mexican market or the Brazilian market, assumptions and inferences must be made from supporting material. It can be assumed to a certain extent that the Mexican labour market did gain managerial expertise and training from Hugo Boss retail outlets, even if there was no major technological transfer or knowledge of the production process.

In terms of catering to the luxury market, Hugo Boss ensures that its employees are highly adaptive and conforming to local traditions, standards, and expectations (Hugo Boss Annual Report, 2010).

Trend of Investment in Latin America:

The company has followed a set trend of investment in Latin America over the past decade. Statistics of the sales figures over the past decade in Mexico were available and are as follows:

( Hugo Boss Annual Consolidated Income Statement,2010)

Although, the sales figures cannot be compared because in the later years Hugo Boss changed its presentation strategy to show sales by region instead of sales by country, it shows a fluctuating sales trend in the Americas region which also constitutes Latin America and Mexico.

The trend of investment over 10 years is not explicitly available, however data for 2007 and 2008 is shown as follows:

( Hugo Boss Annual Report, 2008)

Latin American Investment and Operations:

Hugo Boss has production facilities concentrated in certain areas of the world which include Turkey, Cleveland, Metzgin Germany, and Italy. The production is dispersed in these factories as each of the factories concentrates on producing and fulfilling orders for different markets and different product segments (Hugo Boss Annual Report, 2010).

Hugo Boss’s operations in other countries consist of low resource commitment- franchising and wholesaling agreements and when sales reach a considerable level, the company seeks to expand its retailing operations in the form of wholly owned subsidiaries. Hence, the investment in the LAC region will not be as large as the investment in other regions such as Europe, North America, and Asia. This is because the LAC region is not host to Hugo Boss’s production facilities but focuses on sales distribution and retail outlets.

In the year 2010, the investment in the LAC region increased because of the expansion of the retail business and the opening up of new stores in Mexico and the acquisition of existing franchise partners (Hugo Boss Annual Report, 2010).

SWOT Analysis:

The SWOT analysis of HUGO Boss seeks to explore the strengths, weaknesses, opportunities, and threats of the company in the Mexican region. The analysis will be as follows:

Internationalization Strategies of the Firm:

The company, Hugo Boss, is employing a regional strategy as it standardises its strategy according to the different regions it is catering to, which include Asia, Latin America, Europe and others. The company does not particularly focus upon particular countries and does not become excessively locally responsive as Hugo Boss has a global market presence and cannot change its brand image to suit different countries (Dimitratos, 2004 & Hugo Boss Annual Report, 2010).

Moreover, the company is also not completely standardising its strategy within all regions as it is not offering a highly standardised product but is offering fashion and luxury goods. The company varies its strategy within the regions it operates in.

The company is also focusing upon a global integration strategy as it seeks to maximise integration between its operations in various countries. Focus is upon developed and less developed countries alike, however, the company is largely prevalent in developed countries where it is likely to have more demand because of catering to a premium market segment (Dimitratos, 2004 & Hugo Boss Annual Report, 2010).

The rate of resource allocation is based upon a diversified strategy in which the company seeks to enter many foreign markets at once and is rapidly expanding its operations. The company employs the use of franchising and wholly owned subsidiaries in its foreign markets including Latin America, hence the level of resource commitment is relatively high (Dimitratos, 2004 & Hugo Boss Annual Report, 2010).

Moreover, the company can be categorised as employing a differentiation and focus strategy consecutively. This is because the company has so many different brands catering to different segments and is also focusing those brands on catering to market niches. However, Hugo Boss caters to several market niches at the same time (Dimitratos, 2004 & Hugo Boss Annual Report, 2010).

The last dimension of the internationalisation strategies is the timing of entry. Hugo Boss is not the first entrant into the Mexican market and has a second mover advantage as there are several luxury apparel producing companies in Mexico ( Dimitratos, 2004).

Country-Screening Process:

Hugo Boss has diversified its operations globally and is present in all or nearly all regions of the world. Hence, it does not explicitly state that a specific country screening process if applied. However, Hugo Boss does tend to enter countries with a stable political scenario, stable currency, large potential market, large GDP, opportunities for growth and substantial consumer purchasing power.

Mexico is one of the main countries and cities that constitute Latin America and is a large potential market for luxury goods. The economy of Mexico is becoming ever stable and the purchasing power of consumers is increasing, therefore increasing demand for luxury goods (Hugo Boss Annual Report 2010).

PEST Analysis:

(Hernandez, 2002)

Boston Consulting Group Matrix:

(Hugo Boss Annual Report, 2010)

Market Share

Strategy during 2008-2011:

During 2008 through 2011, Hugo Boss suffered from several downturns because of the global economic recession. The situation was as bad in Mexico as any other region as purchasing power was less and there was a less demand for luxury goods.

The company aimed to cope with this by spreading risk in various countries, increasing brand awareness and having a rigid branding policy and increasing marketing activities. Although sales deteriorated, Hugo Boss was still profitable (Hugo Boss Annual Report, 2010).

References

Dimitratos, P.2004. A Typology of International Business Strategies. Strathclyde Business Unit. 84-103

Dunnings, J. 1993. Internationalizing Porter’s Diamond. Management International Review.33.138-165

Hugo Boss Annual Report. 2010. Business Activities and Group Structure. [ONLINE] Available at: http://annualreport.hugoboss.com/en/group-profile/business-activities-and-group-structure.html. [Accessed 20 November 11].

Hugo Boss Annual Report. 2010. Group Management. [ONLINE] Available at: http://annualreport.hugoboss.com/en/group-profile/group-management.html. [Accessed 20 November 11].

Hugo Boss Annual Report 2010. 2010. Innovation and Development. [ONLINE] Available at: http://annualreport.hugoboss.com/en/group-profile/innovation-and-development.html. [Accessed 19 November 11].

Hugo Boss Annual Report 2010. 2010. Sourcing and Production. [ONLINE] Available at: http://annualreport.hugoboss.com/en/group-profile/sourcing-and-production.html. [Accessed 19 November 11].

Hugo Boss Annual Report. 2010. Group Sales an Results Of Operations. [ONLINE] Available at: http://annualreport.hugoboss.com/en/fiscal-year/group-sales-and-results-of-operations.html. [Accessed 21 November 11].

Hugo Boss Annual Report. 2010. Report on Risks and Opportunities. [ONLINE] Available at: http://annualreport.hugoboss.com/en/fiscal-year/report-on-risks-and-opportunities.html. [Accessed 21 November 11].

Hugo Boss Annual Report. 2010. Consolidated Financial Statements. [ONLINE] Available at: http://annualreport.hugoboss.com/en/fiscal-year/report-on-risks-and-opportunities.html. [Accessed 17 November 11].

Hernandez, J.H., 2002. Social, Cultural, and Politcal Factors in Mexico. Ph.D.. California: University of California