Macro Analysis of a Fashion Business

Macro Analysis of a Fashion Business

Executive Summary

Cotton is one of the leading multinationals in the fashion industry. Its success is attributable to the management’s consideration of macroeconomic factors in decision making. Undeniably, there is a fierce competition between this organization and the rivalling firms as each strive to gain a larger market share. Notably, the business owners have little or no control of the macro-environmental factors since the impact of altering them is insignificant. As such, corporations like Cotton On ought to adjust to the latest technological advances, economic situation, governmental influence, and consumer needs. Not only does the way Cotton On adapts to external factors determine its innate ability to differentiate itself from main rivals but also its long-term success.

Introduction

Cotton On is an Australian fast-fashion retail chain with more than a thousand stores globally. It sells clothes for children, women, and men through Rubi Stores and Cotton On Body Outlets. Ideally, the organization’s first store was opened in Geelong, Australia in the year 1991. However, by the end of 2015, the corporation is present in more than 12 countries and employs 12000 individuals.

Uniquely, a design team in Australia control all the company’s operations worldwide. For instance, they establish the specifications for merchandise production and outsourcing. Therefore, the organization utilizes a horizontal form of labour division in its facilities rather than integration. Cotton On aims at becoming one of the most responsive and innovative brands in the market without compromising the corporate values and culture. Essentially, the management commits to the provision of high-quality products at an affordable price. Besides, the leadership understands the need for an outstanding customer service, especially in maintaining a positive shopping experience for all customers. If the firm meets the consumer’s demands, they will maintain their loyalty to the brand. Understandably, the business success is dependent on customer satisfaction and consistency in quality service provision.

Cotton On has mainly succeeded in the global expansion program because of the employee’s commitment to improving and maintaining the product standards and customer service. The outstanding dedication allows the customers to walk into a brand, unlike any other fashion store. The company’s strategists base Cotton On identity in the market on the product quality, affordability, and trend for casual clothes. They cannot uphold this unless the team consistently considers the external elements of the emerging fashions both locally and internationally. In this way, the brand will reflect on the customer lifestyle and habits.

According to Hill and Jain (2000), the external environment and competitors affect businesses in the fashion industry. Therefore, Cotton On must be aware of the external environment changes to maintain its success. If the firm understands the influence of macroeconomic factors, it will be easier to determine the existing market conditions and how the benefit the business. The economic factors that affect the business include economic growth, interest rates, and inflation.

Economic Growth

An economic activity refers to the level of selling and selling in a business environment over a specified period of time. The process is remarkably complex due to the breadth of aspects involved. Hence, a market strategist can hardly keep an accurate track of it. In a modern world, the economic activity changes rapidly, thus affecting the market conditions and business operations. Some of the reasons that prompt economic activity changes in the fashion industry include future prospects of the consumers, economic conditions in the countries where Cotton On is operational, and the changes in customer income levels. Given that Cotton On is a multinational, the global economic condition and political activities wield an impact on its operations. Further, the economic activity is affected by unstable prices of energy, oil, fuel, and other raw materials (Birnbaum, 2005).

            Countries measure the level of economic activity using Gross Domestic Product (GDP), which is the amount of services and goods produced in a specific region. Often, a fall or a slow-down of GDP triggers a slump in the demand for fashion clothes. Resultantly, Cotton On will witness a sharp fall in profit margin and revenues. To keep the firm from spiralling out of control, the marketers must cut the product prices for a sales increase. Further, this move can result in high unemployment. On the other hand, a GDP increase leads to a rise in Cotton On product demand, hence a price increase. Therefore, the business copes with a soaring demand by hiring more employees and expanding to new markets across the globe. In the long-run, the cost of operation rises due to staff wage increment.

When the host country has a strong economy, the business enjoys a greater prosperity due to high levels of disposable income, high consumer confidence, and low unemployment rates. Consequently, the citizens inject their money back into the system hence prompting a rippling effect. They can afford both the non-essential and essential services and goods. The increase in business activity in the fashion industry encourages firms to recruit new skilled personnel to keep up with the demand. Besides, the boom results in the expansion of retail space and the addition of new product lines.

Inflation

A gradual increase of inflation is healthy for a business entity. However, if there is a hyperinflation, the prices of clothes and other fashion products increase tremendously over a particular period of time (Gali, 2012). Eventually, Cotton On incurs a higher cost of operation. Besides, there will be an unprecedented employee wage increment.

Inflation occurs when the commodity prices exceed the previous levels. In the year 2014, The US Federal Reserve Board of Governors conceded that a 2% inflation rate is consistent with the national mandate for stable profitability and optimum employment. A small amount of inflation guarantees business profitability and gradual workforce expansion. On the other hand, an upwards of 2% triggers an inflationary spiral, where businesses raise fashion prices due to a rise in consumer demand. In essence, this has been the case for South African Cotton On as the business became profitable and hired aggressively to match demand with production.

If there is a tighter labour market, the employee wages will increase. In the end, this results in a higher cost of living due to higher prices of raw materials, home values, rents, and consumer prices (Rambouth and Weilch, 2004). Moreover, the high inflation leads to increased profitability for large international firms due to increased product demand, thus reinforcing an untameable vicious circle.

In the West, a high inflation over the past 10 years is the main cause for a 55% increase in fashion clothing and luxury goods. In the United States alone, economists registered an increased customer net worth index, which explains the rising prices of goods in the fashion industry. Inflation counters the marginal pressure, even though designer brands like Cotton On mark lower their commodity prices for optimum sales.

The sluggish global economy prompts price inflation as the consumers of luxury products adjust their spending to reflect their existing financial realities. Prior to the Western economic downturn, loyal Cotton On customers subsidised their expenditures through savings dipping and credits but this is no longer sustainable or attainable. Consequently, both sales and margins are under pressure. From the organization’s point of view, the weak sterling pound, soaring labour costs, and commodity price boom have led to input price rise. For instance, the price of cotton (a fashion industry raw material) has increased by more than 130% within a year in the Far East despite a slump in oil prices.

Interest Rates

Interest rates refer to the bank charges for lending a loan (Neumeyer and Perri, 2005). Multinationals in the fashion industry like Cotton On are over-reliant on loans to cover the cost of business operations. During the 2008 economic crisis, many US firms depended on loans to survive the turbulent times and worst market conditions. Consequently, banks increased interest rates to inhibit borrowing. Increased interest rates result in higher expenses for borrowers. In addition, the rate hike affects the citizens and product consumers hence influencing the businesses. While clothing is a basic human need, Cotton On provides luxury fashion products and services. Therefore, the demand for the organization’s products in the market will fall with increased interest rates due to the diminishing number of customers willing to borrow money.

Interest rates are part and parcel of daily business operations. In the fashion industry, corporations remit additional interests on the borrowed money. If they have extra liquid assets, firms like Cotton On earn interest for the money they invest in a bank safe. Besides, business entities charge interests for goods and services acquired on credit. Therefore, a fall or rise in the interest rates affects not only the consumers but also the fashion organization.

There is a strong relationship between the floating income in the economic system (for instance cash in the bank) and rising interest rates. When there is lesser cash amount in circulation relative to consumer demands, the value of money is higher. Consequently, banks charge high interest rates for lending it out to reflect the scarce value. It is worth noting that the bank investors will receive high-interest rates since the financial institutions need more liquid assets for lending. Over time, it becomes more expensive for Cotton On and other fashion firms to borrow money to cover the operational costs and to purchase raw materials. High interest rates choke off the economy because it discourages consumers from buying expensive clothes.

Interest rates are low when money is plenty in the system. In capitalistic societies, banks are eager to lend out money when they have ample currency at hand. The prices of goods and services also reflect the low-interest rate levels because of less costly distribution, manufacturing, and operations. Further, the credit card debt pay-down means that investors lack other places to reinvest their income hence they redirect their income to credit card settlement.

The economic constraints force the consumers to be vigilant regarding the fashion product prices. Besides, most luxury brand enthusiasts have an easy access to the World Wide Web, where they search for averagely priced clothes rather than wasting time strolling at malls and fashion outlets. The sophistication of modern technology gives the consumers an unrestricted access to a wide variety of Cotton On outlets throughout the globe via the internet. In fact, the consumer’s access to such information has increased the sensitivity of Cotton On and other fashion retailers regarding the pricing.

Exchange Rate

Cotton On is a multinational that depends on the export of finished products to foreign markets and import of raw materials. Therefore, the exchange rate plays a critical role in its operations, profitability and expansion plan. Specifically, currency devaluation makes exports cheaper, thus raising the business profitability (Campa and Goldberg, 2005). However, the gains can be neutralized by high import costs for cotton and raw materials from the developing world. If the standard currency appreciates in value, it inhibits competitiveness due to the high cost of exports. Notwithstanding, clothing raw materials and energy will become less expensive for Cotton On due to currency appreciation.

When selling abroad, a fashion company faces a greater risk of losing money in comparison with other domestic industries. Like any product manufacturer, customers use purchase orders to demand specific clothes from a brand. The firm may receive the order months before they can ship out the product. As time elapses, the exchange rate can change significantly, thus resulting in a change of order, quality, and pricing. For the organization, there is a positive or negative change in profitability depending on exchange rate fluctuation. Besides the transactional exposure effect, the management’s uncertainty is amplified when purchasing raw materials (Mahoney et al., 2001). The transportation costs and material prices can raise or lower the end product market price.

Government Policies

The government policies form the basis for controlling the international market and trade with regards to technical standards, quotas, and trade tariffs (Cavusgil et al., 2008). For instance, the EU has policies that guarantee preferential treatment for other Western countries and capitalistic societies in Sub-Saharan Africa and South East Asia. Therefore, it is relatively easier for Cotton On to conduct business in these countries in comparison to setting up new stalls in Russia, or communist China. In addition, multinational fashion firms can hardly operate effectively in politically unstable countries.

Governments conceive frameworks and rules for business to compete fairly against each other. Periodically, federal governments change such policies depending on the needs of citizens. In turn, corporations in the fashion industry have to alter their operations to suit the demands, laws, and trade regulations (Malbon and Bishop, 2006). For example, the privatization of state companies in previously communist societies encourages fair competition, thus attracting firms like Cotton On. Further, an introduction of a high corporate tax policy pushes multinationals to pass on the cost to the buyer in the form of high clothing prices.

Trade Agreements

Trade agreements impact trade and investment globally. In fact, they shape inter-organizational business relations. Business exporters like Cotton On will not succeed in the international market unless they are aware and adhere to the trade agreements. In this way, they will understand their customers’ financial concerns.

In summary, Cotton On business performance depends on the global economic trends. Economic factors like bank interest rates, global recession, inflation, and customers’ incomes affect the company’s marketing strategies and consumer spending. Essentially, the organization has yielded low profitability since 2008 economic recession because of increased raw material prices, decreasing purchasing power and rising operational costs. To survive in an increasingly competitive market, the firm’s management is exploring ways to collaborate or merge with dominant corporations in the fashion industry (Griffin, 2008). In this way, Cotton On broadens its reach to a global consumer base thus growing the market share.

Economic factors bear both negative and positive effects on the clothing industry. In the times when the economy is booming, people have enough money to spend and invest. Therefore, most of them buy luxury clothing from global brands like Cotton On. In the process, they increase sales revenue for fashion retail chains. During poor economic times, the fashion sales fall dramatically. Subsequently, Cotton On retail shops are stuck with large inventories. Eventually, the management can decide to sell the stock at a throwaway price to eliminate the mounting storage costs. In other instances, the firm is forced to sell at a slashed price to compete with dominant fashion brands, especially when establishing a presence in a new market.

In light of this discussion, I recommend that Cotton On should conform to the trade agreements, government policies and business culture in different companies it operates. Prior to brand marketing, I am convinced that the management should keenly consider the design descriptions, aesthetic features, pricing, and the market segments. In this way, it will be easier to meet the government’s demands and to maintain competitiveness. It is also advisable that the corporate leadership should consider the rates of inflation product pricing. When penetrating a new market, the brand should conceive a brand equation in the consumer’s mind through the accordance of functional utility and qualitative benefits for a price paid.

Bibliography

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Campa, J.M. and Goldberg, L.S., 2005. Exchange Rate Pass-Through into Import Prices. Review of Economics and Statistics, 87(4), pp.679-690.

Cavusgil, T., Knight, G., and  Riesenberger, J., 2008. International Business, Strategy, Management and the New Realities.  New Jersey: Prentice Hall. 

Galí, J., 2012. New Perspectives on Monetary Policy, Inflation, and the Business Cycle (No. w8767). National Bureau of Economic Research.

Griffin, R.W., 2008. International Business: A Managerial Perspective. Prentice Hall: New Jersey. 

Hill, C.W. and Jain, A.K., 2000. International Business 10/e: Competing in the Global Marketplace. New York: McGraw-Hill Education.

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