SWOT –the firm and the target market analyzed.

We have analyzed the strengths, weaknesses, opportunities and threats for Costo’s market expansion to the U.S. market. The first chart present the analysis from the company’s point of view whereas the second one focuses on the market side. Before moving there let’s first discuss briefly about the background setting for the firm’s internationalization. Costo has market presence in the European and Asian market and traditionally the sales have been conducted through retailers. In addition, the firm has its own online store which delivers the products globally.  However, if we exclude the possible online orders to the U.S., the market area is new for Costo. For a small company expanding to a new market without prior experience from it is a challenging task. SME’s limited resources also influence the entry mode choice, as well as the scale and scope of possible marketing activities which are important in order to gain brand awareness among the new potential customers.

If we look at Costo’s financial performance, we can see, that their revenue has been increasing annually.

Revenue, Costo Oy. Source: Taloussanomat, accessed from: http://yritys.taloussanomat.fi/y/costo-oy/helsinki/2060874-2/

At the same time their return rate plummeted on 2011 and as the statistics are missing the 2012 result, it is difficult to estimate what has been the direction of the development.

Return, Costo Oy. Source: http://yritys.taloussanomat.fi/y/costo-oy/helsinki/2060874-2/

A new market entry could possibly bring in new customers and increase the revenue. But at the same time internationalization requires financial investments from a company. Therefor it carries both, the opportunity and the risk. With the financial data publicly available from the company it is not possible to from this perspective whether or not Costo should expand to the U.S. Therefor we focus on analyzing other factors which are presented in the following charts. 

SWOT for Costo

 

One of the key strengths for the company is their product. It is simple and the design is unique, thus identifiable and a differentiating factor from competing products in the market. Even having only a few hat models in production, the fact that the company is using recycled materials in their production makes each hat a unique product. In addition, this factor makes the product ecological which brings along another potential customer segment of ecological consumers. Being a small firm has its pros and cons. A small company is not tied with heavy organizational structures and processes which can facilitate the decision making and enable also faster reaction on changing market environment. However, the resources in use are fewer than bigger competitors have. Opening an own flagship store or a chain of brick-and-mortars is often too expensive a choice for smaller operators and hence they often internationalize trough a potential partner –for example a retailer or an agent. The latter one offers also a solution for the lack of market information and prior experience that a newcomer may have. Small companies do not necessary have sufficient resources to analyze the market and its potential beforehand and an agent who has this information and potentially an existing customer network can be an optimal choice.

At the same time operating in a market through middle men reduces the firm’s control over its own brand and can reduce the firm-end customer interaction. Brand value is very important for Costo and it should aim to nurture it. How it can do it will be discussed later in this research project.

In the past Costo has not been investing money on marketing and advertising but these activities have based strongly on gonzo marketing and other alternative solutions. It is not enough to enter a new market. The firm needs to let people also know that it has arrived. New York, our first destination to expand in the U.S. is a competitive area and especially in the fashion field. Nevertheless, if a firm is able to gain foothold in N.Y. the reputation can carry further.   

SWOT for the U.S. Market

The big population with similar PPP distribution is a market opportunity for Costo (see the map below). The product is affordable and the pricing does not need to be adapted to the market. This is also an important factor for a firm that is operating through a global online store –the price transparency for its customers.  In addition, online shopping is more advanced and used method in the U.S. due to long geographical distances and the history of the antecedents of e-commerce: catalogue sales and the TV shop. another market specific factor that can help in the market expansion is in the retail structure: big national department store chains and the shopping mall culture.

However, currently the production is in Europe and expanding to the U.S. adds taxes and other exporting costs for the firm. Secondly, has Costo ensured that its production has the capacity to respond to the potentially growing demand of the new market?

Source: World bank, GNI per capita. Accessed from: http://data.worldbank.org/indicator/NY.GNP.PCAP.PP.CD/countries?display=map

Five Forces of Industry

The following considers the industry forces according to Porter's Five Forces model.

Threat of New Entrants

High Pressure:

The fashion and apparel industries are very competitive. According to MarketLine the global apparel industry has grown by 5.9% in 2011 to reach a value of 3 049.51 billion USD.  Nonetheless the high pressure environment of the apparel retail industry hinders new entrants. The quasi-absence of switching costs permits customers from switching from one brand to another. Existing firms in the industry have an established foothold which makes it difficult for new entrants to break out.

There are relatively low capital requirements to enter the industry. On the other hand, larger capital requirements could be required in the event of a new entrant seeking to design, produce and promote a new line.

 .      Threat of Substitution

Moderate Pressure:

It can be agreed that accessories have more than the function of keeping warm. Accessories in the apparel industry can serve the function of representing a social class, environmental values and form an ideal way to express individual identity. This signifies that there are countless possibilities in terms of design, accessibility (brick and mortar stores and e-retailers) and prices.

In certain contexts counterfeit activities can be a problem. While counterfeit goods are associated for being produced in China, Vietnam and other Southeast Asian countries, the United States – and New York in particular, do have a strong counterfeiting presence. The Huffington Post (Dobnik, 13 June 2013) that New York City’s counterfeit apparel and fashion goods are produced in Chinatown and are distributed all over the city.

 .      Bargaining Power of Customers

Moderate pressure:

Despite the economic situation in the United States, both the retail and apparel industries continue to grow. Similarly customers have little or no switching costs between brands, which make for a certain amount of pressure on behalf of the customers. Individual customers do not have bargaining power in the industry; however common recourse can pull more weight. Customers in the industry can be price-sensitive.

 .      Bargaining Power of supplier

Low Pressure:

The nature of international trade has diminished the individual suppliers in the textile, fashion and apparel industries. Low-cost producers in China, Vietnam and Bangladesh have diluted the bargaining power of suppliers. Switching costs for retailers from one line to another and from one supplier is not very high. The risks involved in suppliers revolve around quality of the goods and reliability of the supplier.  Furthermore the lack of diversification of apparel suppliers diminishes their bargaining power since the number fashion retailers representing the values of the brand can be limited Several suppliers increase their bargaining power by coordinating licensing and partnership activities.

 .     Intensity of Competitive Rivalry

High Pressure

The global apparel industry is highly fragmented. The competition is fierce (Jones et al., 2011), as countless brands compete for market share.  A large number of brands seek to differentiate themselves via uniqueness and style to find a niche market. The intense competition of the industry can also trigger price wars, which further intensifies the industry. The fashion and apparel industry is often characterized by its advertising, which increases the intensity of the rivalry because of the difficulty to rise out of the clutter.

References:

Industry Profile: Global Textiles, Apparel & Luxury Goods, 2012. [pdf] London, UK: MarketLine. Available at: MarketLine, http://advantage.marketline.com/Product?pid=MLIP0468-0001 [Accessed 26 November 2013].

Jones, P., et al., 2011. Fashioning Corporate Social Responsibility. Emerging Markets Case Studies Collection.

Analysing the market: PESTLE analysis on the United States and New York

To analyze the macro environment, we decided to conduct a PESTLE analysis. We focused more on issues that have a relevance for this specific entry, with points drawn on both a national and city specific levels.

Political

• Stable political environment and government intervention tends to be quite minimal
• The political environment is quite different from the one of Finland, e.g. in terms of lobbying
• The taxing system is complex, with various taxes with very differing principles put in place. In the state of New York, “the combined sales and use tax rate equals the state rate (currently 4%) plus any local tax rate imposed by a city, county, or school district” (The New York State Department of Taxation and Finance, 2013)
• The United States and members of the European Union (EU) already practice trade very actively and operation is made efficient. In addition, The EU and the United States are currently negotiating on a Transatlantic Trade and Investment Partnership, also known as TTIP, which would remove “trade barriers in a wide range of economic sectors to make it easier to buy and sell goods and services between the EU and the US” (European Commission, 2013).

Economic

• The financial crisis has created insecurity in the behavior patterns of consumers, but otherwise the economic environment is relatively stable and the United States is one of the largest countries in the world in terms of national economy
• The dollar is recognized as a “global currency”
• The Federal Reserve is aiming for an inflation rate of two percent and actually “implements monetary policy to help maintain an inflation rate of 2 percent over the medium term” (Board of Governors of the Federal Reserve System, 2013)
• The metropolitan area of New York is the second-largest city in the world by GDP (McKinsey, 2012)

Social

• The United States as a whole, as well as New York City, are very high in cultural diversity
• Income inequality is high
• The median household income in New York is $56,951 (U.S. Census Bureau, 2013)

Technological

• The United States is one of the most technologically advanced countries in the world
• New York State has a population of over 19 million, of whom over 16 million use the internet

Legal

• Trademark and patent protection is an important issue to recognize
• There are various legal issues that companies might have to assess, like product liability

Environment

• The United States has a strong regulatory environment, concerning both consumers and companies
• New York can be considered as one of the global centers for fashion
• New York City is located rather north and the climate is quite cold, with yearly temperatures ranging on average from -3 to +29 Celsius degrees. On average, there are six months with a temperature drop to below 20 Celsius degrees (The Weather Channel, 1995-2012).

References:

European Commission (2013). Transatlantic Trade and Investment Partnership (TTIP) [website] (November 21, 2013). Available at: http://ec.europa.eu/trade/policy/in-focus/ttip/. [November 27, 2013].

(Board of Governors of the Federal Reserve System, 2013). Why does the Federal Reserve aim for 2 percent inflation over time? [website] (November 26, 2013). Available at: http://www.federalreserve.gov/faqs/economy_14400.htm. [November 27, 2013].

McKinsey Global Institute (2012) Urban America: US cities in the global economy, April 2012. McKinsey & Company.

The New York State Department of Taxation and Finance (2013). Sales tax rates and identifying the correct local taxing jurisdiction [website] (November 4, 2013). Available at: http://www.tax.ny.gov/bus/st/sales_tax_rates.htm. [November 27, 2013].

The Weather Channel (1995-2012). Monthly Weather for New York [website] (1995-2012). Available at: http://www.weather.com/weather/wxclimatology/monthly/graph/USNY0996. [November 27, 2013].

U.S. Census Bureau (2013). State & County QuickFacts [website] (June 27, 2013). Available at: http://quickfacts.census.gov/qfd/states/36000.html). [November 27, 2013].

The story behind Costo hats

Take a look at this awesome video by Slush360 where Costo's owners share their vision behind Costo.

Costo – What is it all about?

First there were four young men who had decided to make their own living and self-employ themselves. These friends were convinced that starting up their own company would be the right thing to do. In autumn 2006, there was no business plan, neither had they decided what their product would be, but yet everyone agreed on investing 700 euros on their future as entrepreneurs. These men had educational background from the fields of designing, clothing design, tailoring and business administration.

The idea for the hats was not totally new. Actually one of the members had created the design during his studies and therefor the patter was ready. Everyone agreed that “there’s already enough products in the world”, thus this group wanted to endorse the idea of creating something ecological. They decided to use recycled and left-over materials from the industry which they were able to get for free through their networks in the beginning.

The guys had no prior experience in starting a business, but they decided to take the risk. The first ten hats were sewn and sent to a friend’s store in Helsinki downtown for test selling. The second ones were taken to a concept store in a nearby shopping center. Against the odds, all the hats were sold in a few weeks regardless of their premium pricing.

The increased interest towards their hats required the company to expand –production was located to Jyväskylä and Estonia and the fabrics came now from European companies’ leftover stocks.  Costo was able to grow without having a well-planned or massive marketing mechanisms to support them.

Currently Costo is sold outside their domestic market through retailers in Middle-Europe and Asia. They also have an online store that delivers globally. The product range has increased from the classic hat model to beanies and other types and the collection also includes accessories, for example shopping bags, and cases for mobile phones, tablets and such.

Sources: Inari Fernandez, Taru Costo-hatun herroista, City-Lehti 24.10.2011, picture from the same article. Product and retailer information from: www.costo.fi

Introduction to the project

Hello reader,

and welcome to our blog! Here you can follow the progress of our brainstroming and analysis towards a hypothetical expansion of Costo to the U.S. market. This project is done for the Global Marketing Management -course at Aalto School of Business.

Some of Costo's signature products, hats.

There has been a lot of discussion globally about environmental issues and economic crisis together with youth unemployment rates. Entrepreneurship and SMEs have been nominated as a potential solution for the latter.

One of the hot topics for companies today is the triple bottom-line, where companies aim to operate in a manner that creates both economic, social and ecological benefits. 

We can also see a change in consumer behavior, with a shift towards more sustainable consumption. Consumption has been identified as one of the top five areas of consumption with most significant impacts on sustainability (Belz and Peattie, 2012).

Costo competes on three main characteristics: quality, style and ecology. The company has managed to expand to Western Europe and Asia, and our question in general, and to you, is: why stop there?

We see that the product is different and the time is right.

We hope you enjoy this adventure for the brand. We highly appreciate all feedback and ideas, so feel free to leave a comment and broaden our horizon!

BR,

Ilona, Sari, Maikki

References:

Belz, F-M., Peattie, K., 2012. Sustainability marketing: a global perspective. Print.