Entering the Swedish market: The Karstadt GmbH case

Table of Contents:

List of Figures

1. Introduction
1.1. Information about the Company
1.2. Scenario and Product/Services

2. PEST Analysis
2.1. Political factors
2.2. Economic factors
2.3. Sociocultural factors
2.4. Technological factors

3. Risk Assessment

4. Market Entry Plan
4.1. Market Entry Strategy
4.2. Corporate and strategic marketing objectives
4.3. Market to be entered
4.4. Market Entry Alternatives

5. Operational Plan
5.1. Detailed Target Market Analysis
5.1.1. Demography
5.1.2. Geography
5.1.3. Psychography
5.2. Market Positioning Statement
5.2.1. Product
5.2.2. Price
5.2.3. Place
5.2.4. Promotion

6. Management Implications
6.1. People
6.2. Profits
6.3. Physical Evidence

7. Monitoring, Controls, Budget
7.1. Measurements
7.2. Control Systems
7.3. Budget

Bibliography

List of Figures:

Figure 1 Organigram of Karstadt Quelle AG

Figure 2 Sweden's population by age and sex on December 31,

Figure 3 Railroads of Sweden

Figure 4 The BCG Business Matrix

1. Introduction

As one of Europe’s oldest and largest over-the-counter retailers Karstadt GmbH, subsidiary of Karstadt Quelle AG (Figure 1), operates exclusively in Germany. The present assignment puts forward the proposal that Karstadt GmbH should attempt to penetrate the Swedish market. Furthermore, a PEST analysis and a risk assessment as well as a market entry plan and a final conclusion will form different parts of this work.

1.1. Information about the Company

The KarstadtQuelle AG (Plc.) is Europe’s largest department store and mail order group. In 2003 the firm’s revenue was € 15.3 billion and the earnings before tax and amortisation of goodwill were € 225 million. 100,956 employees were employed by KarstadtQuelle at the end of 2003 (www.karstadtquelle.de). Karstadt GmbH (Ltd.) as a subsidiary of KarstadtQuelle consists of 212 department stores and 305 speciality stores which accounted for 45.7 % or € 6.972 billion sales in 2003. In addition, the well-known ‘KaDeWe’ (abbreviation for ‘Department Store of the West’) which is situated in Berlin and with 60,000 square metres of sales space the largest department store in Europe also belongs to Karstadt (www.karstadtquelle.de).

1.2. Scenario and Product/Services

Due to the problematic economic situation in Germany with decreasing consumption in retail trade KarstadtQuelle decides to enter new markets within Europe by moving to Sweden. The products/services provided by Karstadt will be restricted to the implementation of department stores in excellent city centre locations at the beginning of the process.

2. PEST Analysis

At the beginning of our process it is useful to examine a PEST analysis which consists of Political, Economic, Sociocultural and Technological factors (Douglas 1995 p. 11). With the assistance of this analysis the environment of Sweden will be evaluated.

2.1. Political factors

Sweden is a constitutional monarchy ruled by the governmental parliament. Moreover, Sweden can be seen as a very peaceful country without participating in a war since 1814. In 1995 Sweden joined the European Union and has been a member of the United Nations since 1946. The current and dominant political force is the Social Democratic Party led by the Prime Minister Göran Persson (www.sverigedirekt.se). Therefore we can say that Sweden is a very safe country with excellent international relations.

2.2. Economic factors

Due to Sweden’s neutrality the living standard of its population can be described as enviable. Sweden has a skilled labour force and outstanding internal and external communications. The purchasing power parity of the gross domestic product (GDP) was $ 230.7 billion in 2002 with a real growth rate of 1.9%. This signifies a per capita GDP of $ 26,000 in the same year. In 2002 Sweden’s inflation rate amounted to 2.2% and the unemployment rate to 4% (www.cia.gov). Sweden’s current interest rate is with 2.5% half a percentage point above the benchmark rate of the European Central Bank (www.sweden.se). The debt of Sweden is now at 50% of GDP whereas in 1998 it was about 75% of GDP (www.sweden.gov.se). Main competitors in the Swedish department store market would be Nordiska Kompaniet and Ahlens (en.wikipedia.org). Recapitulating we can say that the Swedish economy is constantly improving.

2.3. Sociocultural factors

Within the OECD (Organization for Economic Cooperation and Development) countries Sweden’s expenditure on research and development was with 3.8% as a percentage of GDP the highest in 1999 (www.sweden.se). The population of Sweden, which was 8,878,085 in 2003, is increasing annually by 0.01% due to immigration (www.cia.gov). Figure 2 shows Sweden’s population by age and sex as a population pyramid. 87% of the Swedish population is Lutheran followed by Catholics and orthodox (www.cia.gov). Furthermore, we can say that wide cultural differences do not exist between Sweden and Germany.

2.4. Technological factors

As technological factors for Sweden which are relevant for Karstadt’s market entry we can name infrastructure, information technology (IT) and additional distribution channels. Sweden possesses a good infrastructure with 12,821 km of railways (Figure 3), 210,907 km of highways as well as ports and harbours in many important cities which are situated on the coast (www.abacci.com). Due to the fact that Sweden was, in 2003, the number one country with the strongest IT position according to the IDC/World Times Information Society Index (ISI) we can state that Karstadt will not have problems with online selling or other IT supported distribution activities (www.sweden.se).

3. Risk Assessment

Due to insufficient information concerning the BERI index the author decided to select the Sheth-Lutz model for the evaluation of the risk. Obviously, the aim of the Sheth-Lutz model is to identify and to analyse the market potential of countries in order to determine which appear to be most promising for foreign investments (Paliwoda 1993 p. 109). In general, the Sheth-Lutz model contains six environmental factors which can be sub-divided into 15 variables. The Swedish government can be seen as very stable. As a result of this we can state that from the 1930’s onwards the Social Democrats have been the dominating party in Sweden. Their policy and their position were secured among other things by economic prosperity (www.sverigedirekt.se). Opposition groups or parties are the Moderates, the Liberals, the Centre Party and the Christian Democrats (www.sweden.se). As a result of dissatisfaction of the voters an anti-Socialist coalition came into power from 1976 to 1982 and from 1991 to 1994 (www.sverigedirekt.se). Approximately 87% of the Swedish population belongs to the Lutheran church (www.cia.gov). Due to extensive immigration since the 1940’s there are 166,000 members of the Roman Catholic Church, 98,500 members of Orthodox and Oriental churches, some 200,000 Muslims, 18,000 Jews and 8,000 members of other communities (www.eu2001.se). Most of the 8,9 million Swedish inhabitants speak Swedish. Besides, minority languages are Finnish, Meän Kieli, Yiddish, Sami and Romany Chib (www.eu2001.se). Currently Swedish car manufacturing accounts for more than 40% of the total added value in Swedish industry. However, the growing IT industry will increase its significance within the next years. Moreover, the Swedish economy is dependent on a limited number of major international companies like IKEA, Ericsson, Saab, Volvo, Hennes & Mauritz and Electrolux (www.eu2001.se). Furthermore, the energy consumption of 134.9 billion kWh in 2001 is also an indicator of risk according to Sheth-Lutz (www.cia.gov). The first legal barrier is the level of imports and exports. It is argued that the greater the degree of international trade the fewer are the legal barriers and vice versa (Paliwoda 1993 p. 109). Table 1 provides an overview of Sweden’s export and import per capita in comparison to its neighbours Denmark, Finland and Norway. With the exception of Finland, Sweden has lower export and import activities in US Dollars (www.cia.gov). The level of tariffs on imports as a percentage is the second point of legal barriers. Due to the fact that Sweden is a member of the European Union, there are only import duties for other countries. Physiographic barriers are the fifth point of the Sheth-Lutz model and signify that the landscape of a country influence the transportation and therefore on the trade (Paliwoda 1993 p. 109). Concerning Sweden we can say that there are no extremely high mountains, deserts or anything else which should be taken into consideration. Geo-cultural distance is measured in two ways. Beginning with the degree of Westernization. We can say that Sweden is a highly developed country trading with other western countries. On the six-point scale we suggest Sweden is a 5. Furthermore, the distance to the USA of 6300 km is the second factor of the geo-cultural analysis. However, these facts do not have a high influence on our risk assessment. Recapitulating, we can say that Sweden tends to be a very safe country for foreign investments with low risk. On a scale from one as the worst and ten as the best the author would give Sweden an 8.

4. Market Entry Plan

4.1. Market Entry Strategy

For the penetration of the Swedish market the author selected the wholly owned subsidiary approach as market entry strategy. Paliwoda specified six main factors for the selection of a strategy (Paliwoda 1993 p. 138). With the wholly owned subsidiary (wos) approach Karstadt will have a very slow market entry speed. As we stated before Karstadt is willing to open department stores in excellent city centre locations only. Obviously, this method tends to be time-consuming owing to the fact that those shop locations are difficult to acquire. Furthermore, the direct and indirect costs of the wos method are the highest in comparison to other market entry strategies such as franchising or joint ventures (Paliwoda 1993 p. 138). Flexibility or the degree of freedom can be seen as high. Every other market entry strategy has a limited flexibility. In this way Karstadt will be able to decide and act on its own in order to be prepared for changing market conditions. Within the PEST analysis and the risk assessment we have already analysed risk factors. As a result of being a department store Karstadt will have problems with older products which go out of style. Therefore, the exposure to risk can be seen as high. Karstadt focusing on the wos approach will obtain the investment payback in the long term due to extensive initial investments in real estate, equipment and other costs.

4.2. Corporate and strategic marketing objectives

For the first 2 years of activity in Sweden Karstadt will have to acquire shops in excellent locations in Stockholm, Göteborg and Malmö. Naturally, at the beginning of the market entry a well conducted marketing campaign will be executed utilizing different kinds of marketing instruments in order to create awareness, interest and desire of the customer.

4.3. Market to be entered

Generally, we can state that nearly everybody is a potential buyer at Karstadt. A department store like Karstadt offers a wide range of different products like clothes, food, toys, consumer electronics, jewellery, books and household goods. Nevertheless, a slight segmentation is undertaken with the so-called ‘Karstadt Gourmet’ section which offers fine food for exalted requirements.

4.4. Market Entry Alternatives

Besides the wholly owned subsidiary approach further possible alternatives exist concerning the market entry. On the one hand Karstadt could provide licenses to other companies doing business under the Karstadt logo. On the other hand in order to reduce risk Karstadt could seek a partner. Perhaps one of the existing Swedish department stores would be willing to join a partnership with Karstadt. Nevertheless, the most likely market entry mode is the wholly owned subsidiary approach.

5. Operational Plan

5.1. Detailed Target Market Analysis

To specify a precise target market we have to evaluate the demography, geography and psychography.

5.1.1. Demography

- Male/female
- Every age
- Every income

5.1.2. Geography

- Excellent city centre locations
- Cities of at least 150,000 inhabitants
- Pedestrian areas are preferred

5.1.3. Psychography

- Different shopping purposes
- Large variety of products ð no need to visit countless stores

5.2. Market Positioning Statement

For the analysis of the market position the well-known four P’s product, price, place and promotion of the marketing mix are essential (Czinkota 2001 p. 19).

5.2.1. Product

In the case of Karstadt a specific product does not exist. However, the right mix of the different products is important for long term success as well as the service provided by the employees. Swedish consumers will tend to associate a German department store with the same quality they already know from German products.

5.2.2. Price

The price is the only revenue-generating factor of the marketing mix (Czinkota 2001 p. 19). Therefore it is essential to choose a price above the costs of Karstadt and below the ceiling of the strength of demand. Regarding the pricing Karstadt will not have any trouble due to the fact that different qualities with different prices are offered.

5.2.3. Place

Distribution policy covers the place variable of the marketing mix. The aim of distribution/ logistics is to supply the new Karstadt department stores with new products at appropriate times. Most products will be allocated to Sweden from central warehouses in Germany. Others will be regional products.

5.2.4. Promotion

From the promotional point of view Karstadt will start a large advertising campaign two months before they enter the Swedish market to arouse interest in the future consumer. Promotion will include TV and radio spots, articles in main newspapers and billboards. This advertising campaign should be carried out with assistance of Swedish marketing experts in order to avoid cultural misunderstandings.

6. Management Implications

People, profits and physical evidence are three factors which have an implication on management.

6.1. People

For the training and the organizational planning within the department stores German specialists will be required. These specialists will set up guidelines concerning service, customers and the behaviour among staff. Furthermore, German executives in the position of department store managers will be able to direct and to control each department store.

6.2. Profits

By entering the Swedish market Karstadt will achieve an increase in profits in the long term. In the short term the extensively high costs of initial investments will seriously burden Karstadt’s accounts.

6.3. Physical Evidence

The physical evidence of a successful market entry can only be presented after a period of time. In general, annual reports as well as sales figures provide an excellent opportunity to evaluate the outcome of the market entry.

7. Monitoring, Controls, Budget

7.1. Measurements

For the measurement of business success many different methods exist. One of the most common is sales. On the basis of the daily sales returns Karstadt executives can identify the degree of acceptance within the Swedish population. Besides, market share provides the option to evaluate the market position of Karstadt in comparison to their competitors. As we analysed above, in some cases like marketing it is absolutely necessary that Swedish experts be consulted. With regard to the suppliers we can say that mainly known suppliers from Germany will be selected due to the fact that there are old business relations among Karstadt and those suppliers.

7.2. Control Systems

A possible control system beside the central controlling department is the well-known Boston Consulting Group portfolio matrix (Figure 4) which provides the opportunity to analyse the market share and the direction the company tends to take. However, control systems are the above mentioned factors sales, market share, costs and staff.

7.3. Budget

For the budget for the first three department stores in Stockholm, Göteborg and Malmö Karstadt will have to be € 200 million. This means € 60 million for each department store with the purchase of the real estate, the equipment and other facilities. The remaining € 20 million are necessary for advertising, staff and executives salaries.

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