Brazil is the fifth largest country in the world. Its rich culture, natural beauty, and geographic location all contribute to my interest in this location for Lulu Lemon’s international expansion. In terms of cultural distance, Brazilians and Canadians score very differently in individualism and uncertainty avoidance. Brazil is a collectivist society, with high uncertainty avoidance. Canada has an individualistic society with low uncertainty avoidance. Upon analyzing the administrative distance, it became clear that Brazil’s political corruption and customs regulations could be obstacles when expanding to Brazil. This is because Brazil has had many political scandals in the last few years, along with stricter import laws on textiles. Another challenge within the geographic distance is Brazil’s poor infrastructure and heavy congestion. Apart from Brazil’s air transport, the majority of infrastructure in Brazil is old and smaller than needed. In turn, this affects the roads and causes high levels of traffic and road inefficiencies. Finally, the economic distance is that Brazil has a lower average income, and is still struggling after the recession in 2014. If Lulu Lemon can implement the methods outlined below to address the challenges of expanding to Brazil, Lulu Lemon can be successful.
Cultural Distance
After analyzing Hofstede’s dimensions within both Brazil and Canada, a major challenge of expanding into Brazil would be the vastly different scoring of the countries’ individualism and uncertainty avoidance. Brazil boasts a score of 38 on individualism whereas Canada has a score of 80. As a collectivist society, Brazil fosters a supportive environment and often has a 'we' mentality. Canada encourages its employees to be self-reliant and take initiative.1 This could be troublesome as the organizational structures could clash between upper management and retail workers, or the Canadian division could struggle to communicate with the Brazilian division.
In addition, Canada and Brazil's scores range for uncertainty avoidance, with Brazil on the higher end at 76, and Canada at 48. Brazilians show a strong need for rules and regulations, and due to this high score are also very passionate and demonstrative. In comparison, Canadians encourage freedom of expression and innovative ideas, with less importance on the rules. This causes Canadians to be less expressive2. This could cause conflict in the workplace because of confusion between direct and indirect communication. In order to address this issue, all employees should take a cultural awareness training course to benefit from practical tools to reduce cross-cultural misunderstanding and encourage positive cross-cultural working relationships3.
The official language of Brazil is Portuguese, and of 209 million people, only around 3% of the population speaks English fluently. This could prove to be a secondary cultural challenge because of the language barrier. This can be combated by having employees complete an introductory language course. In addition, hiring a translator could help with any miscommunications between cross-functional teams. Company policies and rules and regulations should be professionally translated between Portuguese and English with the help of a translator.4
Administrative Distance
A major obstacle Lulu Lemon may battle is the high levels of corruption in Brazil. The federal structure of the political system means there is a wide range of regulatory agencies, which can lead to demands for bribes from public officials.5 According to the transparency international organization, Brazil scores 35/100, 0 being highly corrupt 6. Canada boasts high ethical standards in its everyday business practices through organizations like the Retail Council of Canada, which advance the interests of the retail industry through effective advocacy, communications, and education7. Therefore, it could be a risk to expand business in a country that was recently under fire for a variety of political scandals. In order to mitigate corruption risks, Lulu Lemon can start by internally and externally assessing the level of corruption risk. With the use of benchmarking and this risk assessment, an anti-corruption policy can be created. Finally, this policy must be strictly followed by all international business managers in order to set a high standard for all employees.
Customs could be a logistical challenge when importing goods into Brazil. The regulations for textiles are especially strict, a license is required and only issued if the payment occurs in the following three days. This import is to be accompanied by 2 invoices, along with following a handful of sanitary regulations. If this intricate process is not correctly followed, hefty fines can be accumulated. The customs tax is 10.73% 8. In order to overcome this possible difficulty, Lulu Lemon must ensure they hire a very skilled Brazilian customs broker. This will ensure the company stays up to date on import regulations and better prepare for goods to enter Brazil at the most efficient rate.
Geographic Distance
Brazil struggles with its transportation routes due to heavy congestion. In São Paulo, a rotation system is in place that prohibits the operation of cars one day a week. This could lower the efficiency of shipping clothing from the manufacturer and/or the distribution center because it will have to be scheduled around the rotation system. Not only that, shipment trucks will take longer to arrive at their destinations because of transportation inefficiencies within ports, and roads. This is due to the poor infrastructure within Brazil. Brazil ranks 73rd in infrastructure, with the highest level of dissatisfaction among 28 countries9. Because of this, goods will continue to be more expensive to produce and transport to retail shelves 10. While Brazil’s air transport is well-developed with 300 airports in the country, Brazil’s transportation inefficiencies are more related to its roads.11 A way to overcome this challenge would be through routing optimization in order to find the most well-organized route. Lulu Lemon could develop a database that includes information on road restrictions, road construction, hazardous materials routes, and preferred truck routes so that the route-planning software used by trucking companies has up-to-date data to work with. Factors that are considered include congestion (which varies by time of day), speed limits, the number of traffic signals or other situations requiring stops, and hills.12 In doing so, an optimal route could be found and implemented in order to work around the congestion and traffic that is common around Brazil.
Economic Distance
Brazil’s economy is the 8th largest economy in the world. However, In 2014 Brazil underwent a 2-year recession that negatively impacted its economy. Real per capita growth has fallen by 8 percent since the beginning of the recession, and today Brazil’s economy is still struggling from the aftermath. Economic recovery has been slow, in 2017 and 2018 the economy grew at a small rate of 1.1%.13, and poverty and inequality are still on the rise. The unemployment rate in Brazil is at 12.4% 14, which is the highest it has been since before the recession. This increased poverty means Brazil’s consumer spending has declined by 8.52% in the last year15. Although there is a large market for athletic apparel in Brazil, these declining numbers and the worsening economy could cause sales to remain stagnant. It is projected that Brazil’s GDP will slowly rise by 2020. Therefore, to lower the risk of expanding in a country with a struggling economy, Lulu Lemon could continue to monitor Brazil’s state until 2020 before choosing to expand there.
Conclusion
After completing an extensive CAGE analysis on an international expansion in Brazil, I do not believe expanding there would be beneficial to the growth of Lulu Lemon. The administrative distance portion highlighted the high levels of political corruption currently going on in Brazil, which could negatively impact Lulu Lemon if they were implicated in a future scandal. In terms of geographic distance, the poor infrastructure and amount of congestion are major barriers to profitability because of the high costs and amount of time that will be wasted on logistics like shipments. In addition, Brazil’s economy took a downturn in 2014 and has not improved enough since. Lulu Lemon should look to expand to a country that is more financially stable and has a stronger economy in order to promote long-term company growth and profitability.