Levi Strauss in MexicoLevi Strauss in Mexico

Team 9Team 9Paul Page Paul Page

Nicole PaquetteNicole Paquette

Nicole PhamNicole Pham

Sergios RahmatoulinSergios Rahmatoulin

Levi Strauss and CompanyLevi Strauss and Company

►Founded in 1853 by Bavarian Founded in 1853 by Bavarian immigrantsimmigrants

►First jeans (Levi’s) were born in 1873First jeans (Levi’s) were born in 1873►Privately held companyPrivately held company►Sales in more than 100 countries Sales in more than 100 countries ►Staff of 11,000 people worldwideStaff of 11,000 people worldwide

Levi Strauss Business Levi Strauss Business DivisionsDivisions

1.1. Levi Strauss, North Americas (LSNA)Levi Strauss, North Americas (LSNA)• Levi Strauss U.S.Levi Strauss U.S.• Levi Strauss CanadaLevi Strauss Canada• Levi Strauss Mexico Levi Strauss Mexico

2.2. Levi Strauss Europe (LSE)Levi Strauss Europe (LSE)

3.3. Asia Pacific Division (APD)Asia Pacific Division (APD)

Feasibility of Selling Levi’s in Feasibility of Selling Levi’s in MexicoMexico

►Currently manufactures in MexicoCurrently manufactures in Mexico 1980s: shifted half of production out of 1980s: shifted half of production out of

the USthe US Rapid growth in border citiesRapid growth in border cities Maquiladoras (economic and legal Maquiladoras (economic and legal

advantages)advantages)►Example: TehuacExample: Tehuacáán (60% of garment industry n (60% of garment industry

is denim)is denim)

►Determine ease of entryDetermine ease of entry

Background on MexicoBackground on Mexico

►GovernmentGovernment: Federal Presidential : Federal Presidential Democratic RepublicDemocratic Republic

►Administrative divisionsAdministrative divisions:: 31 states and 1 31 states and 1 federal districtfederal district

►EconomyEconomy:: free market, free market, trade-dependent trade-dependent country country

►ManufacturingManufacturing:: accounts for about 22% of accounts for about 22% of GDPGDP

►AgricultureAgriculture: : 4.4% of GDP (27.9% labor force)4.4% of GDP (27.9% labor force)

Mexican Economy OverviewMexican Economy Overview

►Middle-income countryMiddle-income country►Young workforce: 34 million peopleYoung workforce: 34 million people►Late 1994:Late 1994:

economic turmoileconomic turmoil devaluation of pesodevaluation of peso worst recession in over half a century worst recession in over half a century

►25% of people living in extreme 25% of people living in extreme poverty in southern states - fpoverty in southern states - few ew advancement opportunities advancement opportunities

Economic & Social ConcernsEconomic & Social Concerns

►Low real wagesLow real wages►Underemployment Underemployment ► Inequitable income distribution with Inequitable income distribution with

huge gaps between:huge gaps between: Rich and poorRich and poor North and southNorth and south Urban and ruralUrban and rural

Economic ComparisonEconomic Comparison

MexicoMexico USAUSA

Gross National Gross National Income per capitaIncome per capita

$5,910 per $5,910 per personperson

$35,060 $35,060 per per personperson

Budget Budget (expenditures) per (expenditures) per capitacapita

$1,334.50 $1,334.50 per personper person

$7,067.51 $7,067.51 per per personperson

Population below Population below poverty linepoverty line

53%(<$2/53%(<$2/day)day)

24%(<$1/24%(<$1/day)day)

13.6%13.6%

(<$11/(<$11/day)day)

Relationship with the United Relationship with the United StatesStates

►North American Free Trade Agreement North American Free Trade Agreement (NAFTA)(NAFTA) Eliminate barriers to tradeEliminate barriers to trade Fair competitionFair competition Increase investment opportunities Increase investment opportunities Protection and enforcement of intellectual Protection and enforcement of intellectual

property rightsproperty rights

Results of NAFTA in MexicoResults of NAFTA in Mexico

► Trade has tripled since NAFTATrade has tripled since NAFTA► Higher wage jobsHigher wage jobs► New opportunities for local entrepreneursNew opportunities for local entrepreneurs► Technological advantagesTechnological advantages

Automated sewing and assembly systemsAutomated sewing and assembly systems Computerized cutting technologiesComputerized cutting technologies Water recycling systemsWater recycling systems Online inventory replenishment systemsOnline inventory replenishment systems

► Increase of imports/exports to/from MexicoIncrease of imports/exports to/from Mexico

2228 31

3541 43 46

5261

80

96

110

137

166

146Mexico’s total exports(billions of US dollars)

PRE - NAFTA

NAFTA

00999897969590

EXPORTS BEFORE and AFTER NAFTA

939291 94898887 01

Source: Mexican Economic Secretariat

US Imports from MexicoUS Imports from Mexico

►Exports to US: $8.6 billionExports to US: $8.6 billion►32.6% share of denim fabric imports to 32.6% share of denim fabric imports to

the U.S.the U.S.►44.2% share of the US import market44.2% share of the US import market

Mexico’s Apparel MarketMexico’s Apparel Market

►Second largest importer of US apparel Second largest importer of US apparel productsproducts

►Expected growth of 15% per year for Expected growth of 15% per year for apparel products apparel products

►Respond to local needs of customersRespond to local needs of customers►Personal selling and influence tacticsPersonal selling and influence tactics

Barriers to EntryBarriers to Entry

►60% of all clothes sold in Mexico 60% of all clothes sold in Mexico are smuggled are smuggled

►$10 billion in illicit apparel$10 billion in illicit apparel►20% are legally imported20% are legally imported►20% are produced locally20% are produced locally

Mexico vs. ChinaMexico vs. China

►Chinese illegal imports caused 32,000 Chinese illegal imports caused 32,000 lost jobs in 2004lost jobs in 2004

►ChinaChina Cheap workforceCheap workforce Subsidies from the government Subsidies from the government

►MexicoMexico Manufacturing cheaper compared to Manufacturing cheaper compared to

Europe or USEurope or US Not as cheap as China Not as cheap as China

Imported Clothes TariffsImported Clothes Tariffs

►Many goods enter Mexico without Many goods enter Mexico without paying proper tariffspaying proper tariffs Mishandling or corruption in Mexican Mishandling or corruption in Mexican

customs customs Deliberately misleading documents Deliberately misleading documents

submitted by exporters submitted by exporters

Combating Illegal ImportsCombating Illegal Imports

►Societe Generale de Surveillance (SGS) Societe Generale de Surveillance (SGS) Verify origin of importsVerify origin of imports Monitor goods from vulnerable industry Monitor goods from vulnerable industry

segmentssegments

►2,700 workers hired to seize illegally 2,700 workers hired to seize illegally imported clothing imported clothing

► Illegal clothing imports dropped 40% in Illegal clothing imports dropped 40% in 2004 2004

““Informal” Apparel Market Informal” Apparel Market

►Fake brand names Fake brand names ►Cheap smuggled clothesCheap smuggled clothes►The principal-agent problemThe principal-agent problem

Principal-Agent Problem: Principal-Agent Problem: ExampleExample

►Clothing company manufactures jeans Clothing company manufactures jeans in Mexicoin Mexico

►US headquarters asks for 100,000 US headquarters asks for 100,000 pairs of jeans pairs of jeans

►Some managers secretly change that Some managers secretly change that number to 110,000 number to 110,000

►Remaining 10,000 illegally sold in Remaining 10,000 illegally sold in Mexico at very low pricesMexico at very low prices

Preventing the ProblemPreventing the Problem

►Monitor employees and managersMonitor employees and managers►Provide salary incentivesProvide salary incentives►Long-term employment contracts Long-term employment contracts

for managersfor managers

Decision AnalysisDecision Analysis

►BenefitsBenefits►Denim demandDenim demand►Product lineProduct line►Target marketTarget market►Region of EntryRegion of Entry

Benefits for Companies in Benefits for Companies in MexicoMexico

►34% federal corporate tax34% federal corporate tax►No withholding tax on dividendsNo withholding tax on dividends►Range of import tax rates: 1% to 25%Range of import tax rates: 1% to 25%►Companies may open checking and Companies may open checking and

deposit accounts in US dollarsdeposit accounts in US dollars

Mexico’s Demand for Blue JeansMexico’s Demand for Blue Jeans

►Growing & increasingly affluent Growing & increasingly affluent domestic market of 91 million domestic market of 91 million consumersconsumers

►$240 billion annual economic output$240 billion annual economic output►Middle class ready for blue jeansMiddle class ready for blue jeans►Middle market: 35% - 40% of populationMiddle market: 35% - 40% of population►Upscale market: 7% - 10% of populationUpscale market: 7% - 10% of population

Marketing StrategyMarketing Strategy

► Increasing US consumers interest in Increasing US consumers interest in name-brand denimname-brand denim

►Promotions:Promotions: Brand loyaltyBrand loyalty QualityQuality DurabilityDurability

Product LinesProduct Lines

►Levi’s BrandLevi’s Brand Original and authentic jeansOriginal and authentic jeans Most widely recognizedMost widely recognized Levi’s 501 jeansLevi’s 501 jeans

►DockersDockers Number 1 khaki pant brand in the USNumber 1 khaki pant brand in the US

►Levi Strauss SignatureLevi Strauss Signature Mass channel Mass channel Value-conscious consumersValue-conscious consumers

Target MarketsTarget Markets

►Levi’s BrandLevi’s Brand Middle-classMiddle-class

►DockersDockers TouristsTourists

►Levi Strauss SignatureLevi Strauss Signature Workers, middle-classWorkers, middle-class

Region of EntryRegion of Entry

Questions or CommentsQuestions or Comments