International Finance Assignment: New Product Launch In Singapore By Lululemon Athletica

Question

Task:
International finance assignment task: Select any Canadian company with international presence and explore the successful business possibilities on the following criterions:

1. Countries to be taken into consideration: Singapore/UAE/Ghana/Vietnam
2. Canadian company taken into consideration should be either entering the selected international country for the very first time or positioning any of its products/services for the first time to target customers in the selected country
3. Canadian company selected or its products/services core strength and especially its relevance and financial viability to the selected country to be explored in-depth.
4. Assignment requires consideration of all 4 important international trade finance pillars – payment options, risk management, financing and information with integrated technology.
5. Tentative projections based on post COVID-19 recovery.
6. Assignment projections primarily based on constructive assumption platform
7. Assignment work requires coverage and completion of all 3 sections: A, B and C.
   1. Based on Risk Optimization Tools:
      1. Commercial, Country and Financial Exchange Risks
      2. PESTEL framework
      3. Risk Identification, Risk Acceptance, Risk Avoidance, Risk Transfer, Risk Mitigation
      4. Pandemic scenario inclusion
      5. Proactive risk management options
   2. Based on Financial Review of Potential Market:
      1. Potential Market – Country Selected: Singapore/UAE/Ghana/Vietnam
      2. Country’s global positioning on international trade
      3. Index of openness – open or closed economy
      4. Economic and financial parameters
      5. Local currency standing – sustaining affordability, sales growth and market share, global foreign exchange value proposition
   3. Based on Prepare Cash Flow/Annual Budget
      1. Primarily based on constructive assumptions
      2. Tentative post COVID-19 scenario to be taken into account
      3. Tentative projections should include when break-even achieved and required sales and profit generation to sustain business venture
      4. Cash flow to include main source of cash inflows, target market segments, required sales promotions
      5. Financial budget to mainly cover main cost overheads, finance (internal/external), revenue source

Answer

Introduction to the company selected in the international finance assignment
Lululemon operates in the athletic apparel and accessories segment. Lululemon’s operations include designing, distributing and retailing of these athletic apparels. The company is headquartered in Vancouver, Canada. Lululemon has traditionally focused on athletic wear like yoga pants and other casual wear. The company operates primarily through two channels – physical Lululemon stores and online e-commerce platforms. The annual revenue of Lululemon stood at $ 3.9 billion in the year 2019, up from $ 3.2 billion in 2018. The net income of the company was $ 645 million in 2019 as against $ 483 million in 2018. Evidently the revenue and the net income of the country have both registered strong growth in last one year.

Report Assumption: Lululemon is launching a new product line – formal wear – in Singapore market. Although the company has traditionally operated in leisure and athletic wear, Lululemon has decided to build the formal wear segment from ground up in Singapore.

A. Risk Optimization
1. Commercial, Country and Financial Exchange Risks
Singapore is characterized by its high degree of openness and has seen staggering economical growth since independence. The GDP of Singapore has risen at a compounded rate of 7.7%. The credit rating of Singapore is AAA as advised by several international trading agencies. Evidently, the country offers very low commercial risk. The open economy system of Singapore provides a conducive environment for all kinds of businesses.

Further, the Singapore’s dollar is one of the most well performing currencies in the world. In the last 20 years Singapore dollar has gained 17% over USD, 8% over Pounds and 18% over Euro. The strength of the Singapore’s currency has ensured that the exchange risk for the foreign businesses operating in Singapore has been minimal over the years.

2. PESTEL framework
The PESTEL analysis for the entering the Singapore market has been outlined in the following points:

Political Factors: Political factors have been historically favorable to economic growth of Singapore. Post-independence tensions with Malaysia and Japan did affect the political stability of the country, however, the company managed to overcome all the international tensions and set stage for rapid economic growth. The current relationship of the country with all the neighboring countries has been very stable. Singapore has been one of the most preferred spots for various western countries for investments and has stable political relationship. Expanding an apparel business in Singapore, therefore, is expected to witness favorable political ecosystem.

Economic Factors: Singapore is one of the most open economies in the world. The open economy system is what the company resorted to give impetus the economic growth of the country. This idea gains prominence in the light of the fact that the company had no natural resource or other natural factors which would have enabled its growth. Singapore is a major manufacturing hub with operations of various multinational companies and industries like financial services, business services and biomedicine among others. The economic resilience of Singapore stems from the diverse set of industries available with highly skilled workforce. The manufacturing and export led economy of the Singapore does seem prone to impact of AI and automation. The country has witnessed a recent uptick in the unemployment rate.

Social Factors: The literacy rate of Singapore is 97% which in turn is closely related to the highly skilled workforce of Singapore. Singapore has witnessed skilled workforce migration from countries around the world. The competitive labor cost and high productivity of Singapore is believed to be a result of the influx of skilled workers. Further, the population of Singapore has a median age of 42 years. The median age ha steadily grown over the years. In 1998 the median age of Singapore was 29 years. Such an aging workforce can have adverse impact on the manufacturing industry of Singapore. With respect to launching a formal wear product line by an apparel company, high literacy and formal workforce are the elements of a conducive environment.

Technological Factors: Singapore is one of the most technological advanced nations in the world. Technology led manufacturing industry of Singapore has ensure higher productivity and development of cutting-edge technology. Specific to apparel industry, technological factors pose no imminent threat rather are an enabler.

Environmental Factors: Singapore is one of the most industrialized nations in the world, the impact of various industries on environment is closely monitored by the ministry of environment and anti-pollution unit. Nevertheless, environmental factors pose no threat to expansion of apparel industry in the country.

Legal Factors: Legislative or regulatory compliances in Singapore have largely been very transparent and an enabler of growth of business. These factors pose no threat to Lululemon’s plan to launching a new product line.

3. Risk Identification, Risk Acceptance, Risk Avoidance, Risk Transfer, Risk Mitigation
Following table captures the major risks associated with the launch of Lululemon’s formal wear product line in Singapore and the respective risk management approach:

4. Pandemic scenario inclusion
The Singapore’s manufacturing led economy has seen adverse impact of the COVID-19 outbreak. The dependency of its supply chains on China also came under scrutiny because of the intense pressure on the supply lines at the onset of the pandemic. The retail market witnessed drastic fall in sales, however, is expected to undergo rapid recovery in the months to come. In terms of risk management, this can be characterized as systematic risk. Although certain diversification in terms of suppliers and geography can help manage the associated risks, it can be stated that an outbreak of a worldwide pandemic will most certainly throw the business off-balance.

To account for post-COVID scenario in business operations following key steps can be taken by the company:

• E-Commerce Business: Since sales through physical stores might witness a fall, the company should focus on building a robust e-commerce business for its operations.
• Marketing: The marketing campaigns of the firm should have the precise contextual messaging. For instance, the firm should highlight the various preventive measures which are in place for the physical stores to mitigate the impact of pandemic.
• Product Line: The product line launch must account for the fact that in short to medium term the spending of the consumers is expected to be in pressure owing to tepid economic activity and lower income level. Lululemon should launch its product line with affordable price ranges with larger design range.

5. Proactive Risk Management Options
Proactive risk management options essentially attempt to predict various types of risks and take corrective measures before any impact. Proactive risk management more of a practice than a specified risk management approach. As outlined in the section before, the Lululemon can resort to various risk management approaches, such steps taken proactively to pre-emptively manage the risk. That said, there are certain risk events which cannot be proactively managed. These are essentially one-off events like an outbreak of pandemic. Companies like Lululemon with operations around the world and supply lines cutting across geographies it is virtually impossible to completely ward-off systematic risks such as a pandemic.

B. Financial Review
1. Potential Market – Country Selected: Singapore
The formal wear product line will cater to the segments like corporate employees and college students. The potential market offormal wear in Singapore can be linked to the male population in excess of 20 years of age and less than 64 years. The population of Singapore in this segment in 2019 was 26.3 million as declared by the government of Singapore. The number of average units purchased has been assumed to be 2. The total market segment of the age group between 20 and 64 years essentially comprises of the workforce. While this segment can be further broken down by age and profession and plugged with a more precise estimate for the average frequency of purchase for the overall market size for the target segment would, therefore, would be $ 342 Million. These numbers have been summarized below:

2. Country’s global positioning on international trade
Singapore is one of the most open economies in the world. Singapore is situated right in the middle of the most of the busiest sea routes in the world with world class infrastructure, manpower and abundant availability of capital. These factors place Singapore as one of the most preferred destinations to set up business. This is reflected in the countries burgeoning business services sector and presence of almost all the major multinational companies.

3. Index of openness – open or closed economy
As mentioned in the sections above, Singapore is an open economy. The Singapore’s economy was adjudged the second most open one in the world by the Legatum Institute in 2019.

4. Economic and financial parameters
The apparel industry of Singapore was $2.7 billion in 2018 in terms of revenue. The market is expected to grow at a compounded annual rate of 1.9% between 2018 and 2021. The per capita income of Singapore was $ 64,581 in 2018. Therefore, the economic and financial parameters associated with the target market indicate a favorable market condition.

5. Local currency standing – sustaining affordability, sales growth and market share, global foreignexchange value proposition
Singapore Dollar has always been in demand in the international market owing the large amount of investments which flow into the country. As indicated in the section above, Singapore dollar has gained nearly 17% against US dollar and 18% against Euro. The foreign exchange position of the country, therefore, adds to the favorable conditions for investments.

C. Cash Flow/Annual Budget
The projected profit and loss accounts of the Singapore business of Lululemon over the next three years have been captured below:

The profit and loss estimates are based on the following assumptions:

1. Lululemon will be able to capture 2% share of the total market of theformal wear in Singapore. The market share is assumed to increase to 5% and 8% in the second and third year respectively.
2. The direct cost has been assumed to be 50% of sales. The other cost or fixed cost components have been broken down into salaries, sales & marketing, payroll, utilities and so on.

The cash flow for Lululemon’s Singapore business has been captured below:

The cash flow over the three years are based on the following assumptions:

1. The cash from investing includes the investments into manufacturing lines and stores. The investments into the stores are expected to half by next year and drop to 25% by year 3. The investments into manufacturing line is one time.
2. The interest rate for the long-term rate raised is 6%. The company has raised long term for each of the next three years.
3. The one-time investments into manufacturing lines, logistics and other headers amounts to $ 15.4 Million

Break-Even Analysis

On a monthly basis the Singapore operations will break-even at 4338 units being sold which translates to 52,052 units sold each year. The overall business is expected to break-even by third year of operations. The cumulative cash flow from the business has been captured in terms of month-wise numbers:

The cash flow from has been represented assuming the one-time investment happens in the time period marked 0, however, the investments towards store expansion and the cash from operations and financing flow throughout the year. The break-even in accounting terms is expected to be achieved by 29th month of operations. This has been depicted in the graphical representation below:

Conclusion
The apparel industry of Singapore provides ample opportunities for Lululemon’s formal wear product line. As per the assumptions in this report, at 2% share of the formal wear market Lululemon will have an operational profit of $ 1.7 million in first year of operations. This number can reach up to $ 6.9 million by the third year. The business for this new product line is expected to break even in the 29th month of its operation. The apparel marketof Singapore when analyzed from all the aspects of international trade finance, viz., risk management, financials etc. can be stated to be a profitable avenue.

References
Craft Driven Market Research. 2018. Singapore Apparel Industry – Fashion Revolution for Asia Pacific Region. Accessed June 19, 2020. https://www.craftdrivenresearch.com/singapore-apparel-industry/#:~:text=The%20apparel%20retail%20industry%20of,US%24894%20million%20in%202018.

Dayani, D. 2018. Investing Overseas for High Returns? Here Is How Currency Exchange Rates Impacts Your Actual Returns. Dollars and Sense. International finance assignment Accessed June 19, 2020. https://dollarsandsense.sg/investing-overseas-high-returns-currency-exchange-rates-impacts-actual-returns

Department of Statistics. 2020. Elderly, Youth and Gender Profile. Accessed June 19, 2020. https://www.singstat.gov.sg/find-data/search-by-theme/population/elderly-youth-and-gender-profile/latest-data

Legatum Institute. 2019. Global Index of Economic Openness. Accessed June 19, 2020. https://li.com/reports/global-index-of-economic-openness-2-2/