Approaching international markets for fashion brands can be a daunting task. With so many options available and so much risk involved, it is really difficult to plan a strategy that can allow your business to grow without being exposed to excessive financial risk.
Understanding how much capital to invest in your foreign operations is a key strategic decision, and in this post, we’re going to discuss a framework – the Uppsala Model for International Growth – that can help you understand what steps to take to maximize your potential profit and minimize risk.
This model is named after a city in Sweden which is known for having developed this model by studying the international strategies of Scandinavian auto manufacturers. Despite being developed around car manufacturers it lends itself to a broad set of manufacturing industries, including fashion.
The model is designed around a fundamental challenge. A business, in order to grow internationally, is required to cover two “distances”:
- A physical distance. Covering a physical distance simply means being able to reach customers who are further and further away from your headquarters. In order to reach clients who are far from your business, you need to build a distribution strategy that will allow you to provide high-quality service and consistent brand experiences abroad. In order to do this, you may need to invest increasing capital to progressively own your full value chain. The value chain is a model that helps us break down the processes that take place within a firm into 4 essential value-adding processes (research and development, production, marketing, and sales). By mapping and displacing these blocks over multiple countries we can understand how businesses can grow by clustering or dispersing certain business operations.
- A psychographic distance. This dimension does not relate to physical distance, but to the increasing changes in taste, habits, and culture that your products need to take into account as they are sold to markets with different cultural dimensions. This distance is not covered through your supply chain but relates to your market knowledge and expertise in addressing foreign customers, based on their unique cultural background. It’s necessary to understand how international customers fit into your segmentation analysis by conducting extensive market research.
In order to “cover” these two distances, the Upsala Model indicates how a brand will expose itself to foreign markets in small but incremental steps, which start from a very low degree of commitment (as in the case of export) but over time will entail a more substantial long-term investment.
Here’s a graph displaying the framework in more detail.
Next, we’re going to look at the benefits and issues connected with each step.
In our post, we’ll also discuss why, over time, fashion businesses competing in luxury markets (haute couture and ready to wear) end up investing in developing their own manufacturing plants and distribution outlets abroad, pursuing a fully integrated value chain.
So let’s get down to it and look at the 4 distinct modes of operation discussed in the Uppsala model in international markets and analyze their respective benefits and limitations.
Step 1: No Regular Export
At the beginning of their journey fashion brands do not actually have any planned strategy when it comes to international growth. This however is not a bad thing. The reason why exporting is a good place to start is that brands need to approach international markets with the same inquisitive mindset that they would use to explore their own domestic space.
At this stage, brands can look at unsolicited foreign orders and understand what kind o products work with foreign markets, and which ones instead would not go well if distributed internationally.
As a result, this approach allows brands to test foreign markets, and collect evidence on the products or collections which have the potential for international distribution, without any long-term commitment of any money or resources. As discussed, this step may be necessary for market research purposes before committing to other, more committing, strategies.
At the same time, due to the high shipping costs, tariffs and border delays customers may not experience the brand at its full potential and may not connect to it as if they were purchasing from the company in-store. In fashion, retail experiences have great relevance for the customer, and purchasing online does not compare to experiencing the brand through traditional retail.
These limitations end up capping the profitability of international sales as they end up impacting customer experiences. As a result, it may be interesting to move up a step, once the target markets have been analyzed and understood.
Step 2: Independent Representatives (Export Modes)
In this second step, a brand decided to invest more long-term by establishing a partnership with an independent representative who will act on behalf of the brand and seek out retail opportunities that can allow the brand to access multi-brand stores.
As a result of this approach, a brand will be able to be sold within a store, at a higher markup price, and will be able to establish long-term connections with vertical retailers in the target market. Developing a network is an essential step in international market growth, especially in the perspective of moving towards the next steps foreseen by the model.
Even with an independent representative, there are still some issues. First and foremost, the representative will take a cut of the sales (usually a percentage), impacting the overall profit of your business. Moreover, the agent will be motivated by his\her own interests and despite working in support of your company, a representative will build relationships that are connected to him\her, more than to your brand.
In this sense, an independent representative could use your products as an opportunity to develop a market for him\herself rather than for your firm.
Being able to directly manage relationships with your clients, in order to have an unfiltered market experience is one of the major reasons why businesses move towards the next step.
Step 3: Foreign Sales Subsidiary
As brands move into foreign sales subsidiaries they enter a new strategic approach that is not based on export strategies or contractual relationships but on foreign direct investment.
In this case, your business is directly investing in a foreign economy by building assets and employing a workforce.
The benefits of this approach are connected with the opportunity to develop a brand experience that is attuned to your brand image and consistent with customer expectations.
In this context, we can see how even developing a flagship store could help to create a luxury experience that brands are able to monetize both in physical and digital retail. Flagship stores entail massive investments, but as discussed in the linked post they can help you increase your brand equity. This is in turn will enhance the existing margins of profit and create new revenue streams.
Despite selling your collection at a premium markup, the products you are selling abroad are still imported from your home country.
In order to take full advantage of economies of scale and location economies, a brand may be required to develop a fully-fledged production subsidiary. This is a step that requires a long-term market commitment and requires businesses to evaluate the risks connected to a long-term strategy.
Moreover developing foreign sales subsidiaries will not necessarily deliver results in terms of gross sales, but it will definitely impact your brand equity and value perceived by your customers.
Step 4: Foreign Production and Sales Subsidiary
In this last step, the brand’s value chain is now completely internationalized as your brand has built assets abroad in order to create and sell products to international customers.
The benefits of this approach are connected with the opportunity of accessing cost reductions. These cost reductions relate to allowing your products not to be subject to import tax, being closer (both physically and psychologically) to customers, and ideally being located strategically on the global landscape to access both social and monetary benefits.
Some of these benefits can come along from investing in economically depressed areas by contributing to the local economy.
Again, just like in the case of the foreign production subsidiary, the costs connected to these operations are high and entail a lot of risks. Not all brands can afford this approach and it’s usually luxury companies who pursue these strategies, in order to provide a total quality management experience to customers who pay premium prices for extra quality.
Great, now that we’ve discussed this model in depth let’s move towards drawing some conclusive remarks.
There you have it. In this post, we’ve seen how the Upsala Model is able to guide us through the maze of international growth by suggesting a step-by-step approach that allows our brand to follow incremental steps aimed at maximizing profitability and minimizing risk.
If you’d like to read more about other internationalization theories that can be used to develop your firm in international markets, we’ve got an additional resource for you: Understanding Internationalisation Theories to Grow Your Firm. In this post, aside from the Upsala Model, we’re looking into the Transaction Cost Analysis and the Born Globals approach.
If you’d like to read more about strategies that can be adopted to enter international markets, in this post we’re looking into a variety of entry modes that can be used to bring your product into foreign markets.
If you’d like to read up more about international marketing, don’t hesitate to visit our blog to access a wealth of free resources.