In the last few years, Israel improved its textile and apparel industry. The Israeli textile industry overcame the obstacles of “small domestic customer base, distant export markets, and high costs” due to the emerging high-tech industry in the country. (Solomon, 2001). New manufacturing methods improved quality, increased productions, and lowered costs. The country also has a well-developed labor force, with a high level of education and human capital. With the achievements in the last 15 years in information and communication technology, “there is no reason that Israel could not grow much faster and become one of the most prosperous countries in the world.” However, the political issues Israel is facing with its Arab neighbors hinder the development of, otherwise, a promising market (Krawitz, 2006).
Political Economy and Trade Regulations
In 1975, Israel’s government signed a Free Trade Area (FTA) agreement with Europe. In 1985 Israel also signed an FTA agreement with the US. According to the agreement, “all custom duties between the two countries have been eliminated.” The agreement reinforced the mutual trade between the US and Israel over the years. Today, Israel is the largest US export market in the Middle East, trading over $26 billion worth of goods in 2007 (U.S. Government Export Portal, n.d.). Thousands of US companies are already operating in the small country, taking advantage of its growing economy. Besides, Middle East peace treaties with Egypt and Jordan (in 1979 and 1994 respectively) “enabled companies to move production to lower-cost countries in the region.” These policies caused import duties on textile and apparel to drop significantly (Solomon, 2001).
The most successful apparel companies in Israel often choose to be export-oriented due to the small country market. The textile and apparel industry gains from the FTA agreements Israel has with the US, the EU, Canada, and Mexico, including low-labor countries such as Jordan, Egypt, Turkey, and the Palestinian Authority (Solomon, 2001). Therefore, VS can take advantage of Israeli textile factories that are already exporting items to the company in the US, and make profit in the Israeli market by selling its brand name items to Israeli consumers as well.
Made in Israel
Delta Galil Industries, an Israeli company, “is a global manufacturer and marketer of quality private label ladies’ intimate apparel, bras, leisurewear, and nightwear.” The company sells its products to different retailers in the world such as Wal-Mart, Mark & Spencer, JC Penny, and VS. In the last few years, Delta Galil has shifted European manufacturing partners to low-cost countries in the Middle East. Delta Galil provides its customers with product line planning and design, high quality apparel using automated manufacturing processes. The company also offers marketing, packing, and distribution of finished goods customized to the requirements of customers in Europe and the US (Edgar Online, Inc., 2007).
Tefron is another Israeli company that has invested a lot in technology and R&D to develop major innovations in the apparel industry. The company uses “computerized robotic manufacturing methods that resulted in international recognition as a leader for new manufacturing technologies.” The company is a market leader for producing items to major companies such as VS, Gap, Banana Republic, and Cacharel and Dim (Solomon, 2001).
Sold to Brand Names
Having big manufacturing facilities in Israel with high quality products and innovative technology, which already established long-term relationships with VS, makes expansion to Israel an easy task. The different FTA agreements with neighboring countries, the US, and the EU, have also facilitated the process by having low labor costs. The Israeli companies have not established independent brand names, and “research by the Israel Export Institute shows that in the clothing sector, more than 90% of exports are sold under a different company’s brand name” (Solomon, 2001). VS is a brand name that Israeli clothing companies and chain stores would love to do business with.
Demographics and Culture
Israel is a very small market, and the big trade with the US seems strange at first glance. However, a deeper look at the Israeli culture shows a great resemblance to the American society. Last year, one in fifteen Israelis visited the US. Today, more students from Israel study in US universities than from any other Middle Eastern country. Israelis and Americans have similar tastes and lifestyles. In fact, Israelis love to shop for clothes when visiting in the US; American brand companies have a good reputation, but are very expensive in Israel. In addition, on March 1, 2008 a group named “Bring Victoria’s Secret to Israel” was opened on the Facebook website and already has more than 5,000 members. (Reznik, 2008). Also, VS can take advantage of its Israeli supermodel, Bar Refaeli, who is well-known in her home country, to promote the company’s products in Israel. Furthermore, 64.2% of Israel’s population is between the ages of 15 and 64, which is a little over 4 million people, half of them are females. Meaning, about 2 million females, the main target market of VS, all live in a relatively small area (Central Intelligence Agency, 2008).
Geography and Climate
Israel’s Mediterranean climate is a perfect fit for the different designs of VS’s swimwear. Israel has two main seasons: a short winter and a long summer. In addition, over half of the population resides next to the coast line in major urban cities such as Tel-Aviv, Haifa, Ashdod, and Ashkelon. Furthermore, many tourists and Israelis alike arrive to the Dead Sea and Eilat (southernmost city in Israel, which offers a wide range of unique attractions next to the Red Sea). VS can take advantage of the warm weather and the tourist locations in the country to implement a successful expansion for its swimwear line.
Potential Competitors
Gottex is the leading swimsuit brand in Israel, which has put the country on the map of fashion. Therefore, Gottex can give VS a hard time when entering the Israeli market. The company is “known for the traditional colors, sexy cuts, and creative blends of textiles apparent in every suit carrying the label.” Gottex is sold in retailers such as Macy’s, Saks Fifth Avenue, and Bloomingdales in the United States; other markets include European, Asian, and South American countries (Gottex, n.d.). Gottex, however, concentrates on swimwear, whereas VS offers a variety of intimate apparel and even cosmetics.
Another major competitor in Israel is the German company, Triumph, which entered the market back in 1969. Triumph has an estimated 40% market share in the bra business in Israel. Triumph-Israel won two export awards in 1999 for increasing export by 25%. Company policies state apparel items must be manufactured in 30 different countries. Every factory produces a specific item, which is distributed to all 70 markets the company works in. The Israeli factories of Triumph actually produce for VS and are sent to the US. By selling its products in Israel, VS can take advantage of the Triumph factories in the country to avoid export costs, and use the established relationship the two companies already have to its own benefit in the Israeli market (Kotan, 2001).
Social Responsibility
As Limited Brands sources goods from different countries around the world, it makes sure all suppliers follow the company’s labor standards. The company is committed “to raise labor standards and improve legal compliance,” and takes initiatives to join forces with leading companies, NGOs, labor groups, and so forth (Limited Brands Inc, 2008). However, the company’s supply chain has faced criticism for sourcing its items from sweatshops with labor violations. At the end of 2006, the company decided to turn to MAS Holdings, a $650 million apparel manufacturer in Sri Lanka, to protect its reputation and comply with ethical manufacturing initiatives. The company provides its workers with transportation, free meals, medical care, school funding, and more. Not surprisingly, MAS Holdings has quickly become VS’s biggest supplier (Watson, 2006).
The MAALA-Business for Social Responsibility Index article has ranked 53 Israeli companies in 2007. The index rated the largest public and private companies in Israel ranging different sectors such as construction, infrastructure, trade, and industry. Delta Galil is ranked in the top 30 for achieving high international and local standards of corporate responsibility (M.G.M. International Publications Ltd., 2007). The fact that VS is doing business with a socially responsible Israeli manufacturer, together with its own social responsibility efforts around the world, should make a good impression on Israeli customers.
Labor Policies
Work conditions in Israel are agreed upon by work agreements negotiated between employers and employees. However, a few conditions are enforced by law and consist of a maximum of 47 hours a week, minimum wages, compensation for overtime, paid vacation, and sick leave. (Israel Ministry of Foreign Affairs, 2006). In contrast to the US, labor policies in Israel do not concern the Israeli public as much as they concern Americans. Companies that act unethically and violate different policies are easily monitored in such a small market as Israel. Moreover, any little violation or misconduct would make big headlines in the Israeli media and could destroy a company’s reputation. VS should pay close attention to labor policies to not only enter the market, but stay in it.
Social Environment
Israel’s laws and regulations concerning the environment protect nature and natural resources. With over 12 thousand industrial plants, Israel promotes the view that prevention costs are lower than repair costs, and supports efficient usage of raw materials to strengthen economic competitiveness (Israeli Ministry of Environmental Protection, 2006).
VS mails over 350 million catalogues annually, and has long been criticized for using scarce forest products in its catalogs. At the end of 2006, the parent company, Limited brands, decided to establish more environmentally friendly catalogs. Today, the catalog is made of 10% recycled paper from post-consumer waste. Furthermore, VS is committed to cutting back catalogs printed on pulp and reducing paper usage (Merrick, 2006). As long as VS keeps taking steps to be environmentally friendly, no environmental threat exists in Israel. Moreover, according to Internet World Stats (n.d.), 51.1% of the population in Israel had access to internet in 2006. Establishing an internet web site in Hebrew could increase sales and reduce expenses on catalogs (which will cut back on paper).
Transaction and translation costs
In recent years, 1 dollar was worth about 4.5 shekels. Today, the Israeli shekel is considered to be much stronger, being at around 3.5 shekels to the dollar and going even lower. However, the Bank of Israel has decided to purchase $12 billion in the next two years to stabilize the currency (Pilot, 2008). For VS, as for any other American company, export expenses will be higher than before. VS has been doing business with Israeli factories for many years. Therefore, many products are already in Israel, or in neighboring countries with lower labor cost. VS will not have to spend much for having the Israeli factories’ products under its brand name and then sold in Israel. In fact, the company can save money on shipping some of the products back to the United States, and make profits by entering the Israeli market. Thus, avoiding the expenditures encountered by the exchange rate between the US dollar and the Israeli shekel.
Conclusion
After analyzing the different characteristics of Israel that can impact an international expansion, the consideration of VS to enter the country’s market seems to be a logical one. Free trade regulations with the rest of the world give the Israeli market a major competitive advantage compared to other Middle-Eastern countries. Israel can easily export products for low cost, either duty-free or at reduced tariffs. Therefore, VS has already been taking advantage of Israeli manufactures to produce some of the company’s items.
Although the violence between Israel and the Arab neighbors continues, the peace treaties achieved in the past helped the Israeli economy to prosper. The fast development of the high-tech industry in the country also led the textile industry to thrive. The warm weather in Israel, the demographics, together with the cultural similarities between Americans and Israelis, set the grounds for VS to get into business in Israel and be successful. The potential competitors in Israel are not less threatening than the competitors the company has in the US. However, the brand name of VS is by far more impressive and well-know than Gottex, Triumph, and others.
As long as VS keeps taking steps to be environmentally friendly and maintains a long-term relationship with socially responsible companies who do not violate labor policies, the company has a good opportunity in Israel. Furthermore, the instability between the US dollar and the Israeli shekel can be avoided by selling VS’s items, which are already produced by Israeli factories, in the Israeli market. Bottom line, selling VS products in the Israeli market is a smart thing to do.
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