Caifu Company’s Investment in Topshop and Matalan

Executive Summary

This report carries an in-depth analysis of Topshop and Matalan in order to help Caifu to choose the best company to buy stocks. The report noted that both companies are facing decreasing sales due to the deflationary crisis in the UK. However, Matalan has poor management, which has contributed to declining sales. Although both companies face increasing competition, the primary research showed that Topshop has an advantage of its brand name and customer appeal. Therefore, Caifu should consider investing in Topshop because it has high sales, which means high returns on invested capital.

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Introduction

The British clothing industry is experiencing a low-profit margin, which is attributed to a number of factors. Therefore, investments should be made with special consideration. Strategic management plays a vital role in determining the success of companies in the UK during this deflationary crisis (Gibbons, Scott & Fhionnlaoich 2015). The decisions made by managers affect how the organization will be able to achieve their goals (Robbins & Coulter 2007). It includes organizational structure, leadership style, and corporate culture. In order to achieve a competitive advantage, companies use their workers as a tool to help them achieve their goals.

In terms of secondary sources, it is important to consider objective data concerning the marketplace competition and the companies’ financial performance, whereas the primary research in a form of a survey was used to evaluate customers’ appeal. Competition has increased in the UK market because it is easier for foreign companies to enter. Peacock (2013) noted that the UK is open for businesses because foreigners own most of the big firms in London (Peacock 2013).

For example, Chinese companies are estimated to have acquired UK private firms worth £12bn in 2008 through mergers and acquisitions (Olivia 2014). The results of the conducted survey were used in the discussion of Topshop and Matalan’s brand image and the SWOT analysis.

Overall, the objective of this report is to present a critical evaluating of the current performance of Topshop and Matalan and to assess the advantages and disadvantages associated with an investment in these companies.

Matalan Company Profile

Matalan is one of the leading clothing companies in the UK. It was established in 1985 with the concept of US shopping club. Matalan retail outlets offer a wide range of modern fashion and brand clothes at exceptional prices. The company has expanded its business operation from eight stores in the last 10 years, to 217 stores by 2011. Matalan also plans to acquire another 100 stores in the next three years. Most of the stores average 30, 000 square feet. The stores are divided into four departments, including Home’s, Men’s, and Women’s Wear (Matalan Year End Financial Statements 2016).

The retailer Matalan is struggling with increased competition, which has reduced its market share and profitability. According to Olivia (2014), sales dropped by 0.2 percent in 2014 to £1.122bn. A similar trend was also reported in the EBITDA, which decreased from £100.4m to £95.4million. That is an indication of the severe economic conditions in the UK (Olivia 2014). Moreover, the deflationary crisis has discouraged consumers from spending in the clothing industry.

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However, online sale increased by 32.9 percent in 2014, which is an indication the company is investing in its online platform. The declining revenues are associated with high debt used during its expansion. For instance, Matalan management estimates the company intends to issue new bonds of £150 million in order to be able to cover its debts effectively (Matalan Year End Financial Statements 2016). Moreover, the company plans to expand its existing credit facility to £50m to overcome its debt crisis, which produces additional challenges.

Topshop Company Profile

Topshop is a UK multinational company that specializes in clothing, accessories, and make-ups. The company has 440 outlets in more than 33 countries around the world. Topshop is currently operating an online shop, which has allowed the company to expand faster and increase sales. Topshop is part of the Arcadia group of companies, which operates an outlet in many parts of the world, including Dorothy Perkins and Burton.

The company is operated under the Sit Philip management. Today, Topshop is focusing on expanding its business operations in new dynamic markets. The company relies on its strategic strength in a variety of products and reasonable pricing to finance its expansion. The company was founded in 1964 as an original brand from Peter Robinson’s Topshop and has expanded its operations to more than 30 countries (Arcadia Group Financial Results 2016).

Today, Topshop has more than 300 stores in the UK that includes its iconic flagship. Topshop has expanded its business operations in the US and South Africa, which is an indication the company, will report high sales in future. It relies on its strategic management capability to make sound investment decisions. Since 2002, the company has invested in sponsoring NEWGEN scheme as a way of taking advantage of innovative skills in the UK.

Management has taken advantage of sponsoring students who are interested in fashion so that they can introduce their innovative skills and talents in the company. Talent management has been a major booster of Topshop sales and fashion design. In fact, the company investment has paid off because it is the first street brand to be featured in Vogue magazine with the image of its model Kate Moss (Bhardwaj & Fairhurst 2010).

Topshop has been performing exceptionally well in the last seven years. According to the consolidated statements of Arcadia, Topshop generated £2,682.5m in revenues. These revenues include those generated from online stores which increased by 27 percent in 2011. The total consolidated pre-tax was £133.1m in 2011, which is an indication the company is making enough profit to finance future expansion. Moreover, the company has huge funding sources that enable management to open new outlets almost every year. In other words, Topshop is one of the best companies that investors can be able to earn adequate returns on their investment. Therefore, investors should purchase Topshop shares in anticipation of high returns (Arcadia Group Financial Results 2016).

SWOT analysis

Goldfarb and King (2016) noted that SWOT analysis is an evaluation tool used to measure the internal and external strength, weakness, opportunities, and threats of a company (p.172). SWOT analysis is a vital tool that helps both managers and investors to evaluate firm long-term sustainability.

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Topshop SWOT analysis

Topshop succeeded in being one of the leading clothing brands in the British market. However, in terms of company investment, there are still some strengths and weaknesses, as well as potential threats and opportunities for development. The following table represents the SWOT analysis for Topshop.

Strengths Weaknesses
  1. One of Topshop’s major strengths is a very specific customer appeal. The company relies on a particular social group of customers, which is why it produces youth fashion, teen fashion, and generally highly fashionable clothes that cannot be regarded as merely casual.
  2. The company’s brand name makes it more sustainable in a rapidly changing market.
  3. Topshop engages with customers by sending them notifications concerning new collections, discounts, sales, etc.
  1. Allegedly, Topshop has limited customer outreach because of its specialization on non-classic, highly fashionable clothes that mainly appeal to young people. Although Topshop launches petite, tall, and plus-size models of clothing and maternity wear, there is still significant criticism.
Threats Opportunities
  1. At the moment, there is a threat of foreign competition since the production costs of British clothing companies are sometimes higher than foreign competitors. It may result in Topshop losing some of its customers who will choose less expensive products manufactured by both foreign and domestic companies.
  1. Due to its worldwide known brand name, Topshop has many opportunities to expand its distribution. The company has little representation in Africa and the Middle East, but with the help of additional investment, it will be able to expand and increase sales.

Figure 1. The SWOT analysis for Topshop.

The major strength of Topshop lies in its ability to understand its target market extremely well. As a result, the company has been able to leverage every fashion trend in the market by being the first to discover new design (Guy 2016, p. 28). The company has also been able to create a powerful brand image.

Topshop takes advantage of digital technologies to gain customers feedback and recommendation for improvements. For instance, Topshop has launched TAPP, which is a new platform that allows customers to communicate directly with Topshop employees that will enable them to share best practice, new fashion, and areas that need improvement. The new technology has allowed the company to increase not only sales but also to creating a powerful brand image (Gibbons, Scott & Fhionnlaoich 2015, p. 34).

The company has limited discount offers for students who represent a significant market share (Korn 2016). Topshop has many opportunities, especially in expanding its market in the emerging market. The company has huge resources that it can use to open new business facilities in the emerging markets, especially in Europe and Asia. The growing number of middle class in the emerging markets in Asia presents a lucrative business opportunity (Robertson, Blevins & Duffy, 2013).

The major threat facing Topshop is competition from existing and new entrants. In the UK, barriers to entry in the clothing industry are very low, which allow other multinational companies to introduce their businesses easily.

SWOT analysis for Matalan

Matalan also has a number of specific features in its supply change that can be used to the company’s advantage. However, there are also certain risks associated with the company’s weaknesses and threats. The following table represents SWOT analysis for Matalan in its current context.

Strengths Weaknesses
  1. Matalan is known as an exceptional customer service and customer appeal.
  2. Some of the new locations of Matalan stores give the company a certain advantage.
  1. Matalan’s supply chain is a challenge in terms of its management. Since the company’s changed some of the locations, there was a significant reduce of sales caused by poor planning and stock control.
  2. At the level of product distribution, the company’s stores are managed quite well, which indicates the integrity of the supply chain.
Threats Opportunities
  1. There is a threat that Matalan will not be able to sustain a level of sales because of moving stores outside London area.
  2. With increasing competition in the industry, Matalan can strategically lose because of changing location.
  3. From the ethical perspective, Matalan faced a lot of criticism.
  1. Due to the fact that today Matalan stores tend to be located outside London, the company has various opportunities to reduce the costs of logistics and store maintenance as well as make its supply chain to be faster and efficient.

Figure 2. The SWOT analysis for Matalan.

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Thus, the main strengths of Matalan relate to its employees, level of customer service, and trying to take advantage of the new store location. Matalan has been able to take advantage of its well-trained staff to enhance a positive customer experience in stores. The major weakness challenging Matalan is bad planning and poor stock control. Poor planning can be witnessed in its decision to move from Skelmersdale to Knowsley, which has reduced sales.

Matalan has impressive opportunities due to the location of its store. Matalan has adopted the American out of town location, which increases accessibility. Since most of the stores are located outside the towns, they can be able to attract many customers who prefer to shop outside the cities. The major threat facing the firm is stiff competition from rival companies in the industry. Companies such as Good Look are willing to lower their prices, which has significantly affected the ability of Matalan to make revenues, and retain its market share.

Challenges and the code of ethics

Planning and controlling

Topshop faces with planning challenges because the stores are too big to manage with numerous lines of products. As a result, organizing the company becomes a problem especially because accessibility takes away the uniqueness of the stores. As a result of poor planning in Acardia, the group company closed 260 stores (BBC News 2016).

Matalan is facing poor planning and bad stock management, which has led to decreasing sales. Because of bad management decisions, the company’s stocks have declined coupled with poor sales. Poor planning occurred when managers decided to move the head office from Skelmersdale to Knowsley without adequate resources to run the new branch (Gleeson 2015).

Controlling big stores and many workers in Topshop has become a major problem. Managers cannot be able to control employees and the inside display of the store. For instance, most of the stores are disorganized making it difficult for customers to identify products. Matalan management faces challenges in managing it brand image. Although the company has a significant market share, it has failed to control and improve its brand image.

Organizing and leadership

Matalan management has poor organizing skills especially on it workforce. The company has failed to organize its employees and debt structure. As a result, Matalan was forced to cut down the number of workers. Topshop managers face the challenge of organizing the stores due to the numerous products. For instance, Topshop has been compelled to increase the number of supervisors in the stores, which has increased management cost.

The major challenge facing Matalan management is leading and motivating its workforce. However, poor human resource management has demotivated employees to perform their duties as expected. Topshop is facing challenges in leading the organization to achieve its goals due to the high number of staffs. It has become almost impossible to manage the company, which has made it complex and rigid.

Code of ethics

On one hand, a certain code of ethics is meant to enable the companies to create a cohesive understanding between managers and employees (Braxton & Bray 2012). However, on the other hand, production methods and dubious company strategies can create some ethical dilemmas in terms of sustainable company image (Valentine & Johnson 2005).

In the context of the modern fashion industry in the UK, a lot of concerns nowadays relate to labour rights violations by some companies. The table below represents the issues concerning codes of ethics of Topshop and Matalan.

Topshop Matalan
  1. The chief executive of Topshop received “£1.2 billion dividend was enough to double the salaries of Cambodian’s whole garment workforce for eight years” (Winnett & Newell 2007).
  1. Matalan also received criticism for underpaying its workforce in Asia.
  2. The major ethical issue is an alleged labour rights violations concerning the incident of using the child labour in Uzbekistan for picking cotton for Matalan factories, alongside other British fashion brands (War on Want, 2015).

Figure 3. Issues of Topshop and Matalan’s codes of ethics.

In such a way, it is reasonable to suggest that Matalan raises more ethical concerns than Topshop. Although both brands infamously use foreign factories that provide cheaper workforce and are less expensive to maintain than manufacturers in the UK, allegations regarding using child labour represent a more worrying issue. Moreover, the scandal concerning incidents with children picking cotton for clothing factories are more recent and more notorious in terms of both publicity and ethical standards.

Organizational structure

Topshop has a tall organizational structure with different levels of management in the hierarchy. Each manager in the hierarchy tends to have control of 10 workers at any given time. This structure has been implemented because the company is huge and has many operating stores across the globe. Moreover, it is a corporation in a group of companies making the structure the best. Communication between workers and managers is limited since every manager has to control many employees at the same time.

Matalan, however, has a flat organizational structure. Managers in Matalan focus more on developing new objectives, strategies, and policies when selecting and training workers. Both companies have implemented a clear code of ethics, which has helped them to increase market share.

Conclusion

Overall, after the critical evaluating of the current performance of Topshop and Matalan and assessing the advantages and disadvantages associated with investment in these companies, Despite the fact that both companies face increasing competition, the primary research showed that Topshop has an advantage of its brand name and customer appeal. Furthermore, Matalan is still overcoming allegations of using child labour for its factories overseas. Therefore, Caifu should consider investing in Topshop because it has high sales, which means high returns on invested capital.

References

Arcadia Group Financial Results. 2016. Web.

BBC News 2016, Arcadia Set to Close Up to 260 Stores as Profits Fall. Web.

Braxton, JM & Bray, NJ 2012, ‘Introduction: The Importance of Codes of Conduct’, New Directions for Higher Education, vol. 2012, no. 160, pp. 1-4.

Bhardwaj, V & Fairhurst, A 2010, ‘Fast Fashion: Response to Changes in the Fashion Industry’, The International Review of Retail, Distribution and Consumer Research, vol. 20, no. 1, pp.165-173.

Gibbons, P, Scott, S & Fhionnlaoich, CM 2015, ‘Strategic Management’, Irish Journal of Management, vol. 34, no. 1, pp. 22-41.

Gleeson, B 2015, Major Problems at Matalan’s New Knowsley Distribution centre Blamed for Retailer’s Financial Woes. Web.

Goldfarb, B & King, AA 2016, ‘Scientific Apophenia in Strategic Management Research’, Strategic Management Journal, vol. 37, no. 1, pp. 167-176.

Matalan Year End Financial Statements 2016. Web.

Olivia, G 2014, Matalan Profits and Sales Drop as it Refinances Debt. Web.

Peacock, L 2013, Britain Open for Business as Half of City Firms Are Foreign-Owned. Web.

Robbins, S & Coulter, M 2007, Management, Upper Saddle River, New Jersey.

Robertson, C, Blevins, D, & Duffy, T 2013, ‘A Five-Year Review, Update, and Assessment of Ethics and Governance in Strategic Management’, Journal of Business Ethics, vol. 117, no. 1, pp. 85-91.

Streeter, S 2016, Why Chinese Companies Want to Buy British Businesses. BBC News. Web.

Valentine, S & Johnson, A 2005, ‘Codes of Ethics, Orientation Programs, and the Perceived Importance of Employee Incorruptibility’, Journal of Business Ethics, vol. 61, no. 1, pp. 45-53.

War on Want, 2015. BHS, Peacocks, Matalan ‘Shamed’ on Sweatshops. Web.

Winnett, R & Newell, C, 2007, ‘Topshop Clothes Made with ‘Slave Labour”. The Sunday Times. Web.

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StudyCorgi. (2021, January 17). Caifu Company's Investment in Topshop and Matalan. Retrieved from https://studycorgi.com/caifu-companys-investment-in-topshop-and-matalan/

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