Executive Summary
This paper provides an analysis of JD Sports, which includes an analysis of external and internal factors, the definition of a development strategy, and recommendations in the context of the company’s entry into the real estate market. The paper also provides a brief history of the company, all the potential difficulties and advantages of diversification, and an overview of competitors, threats, and opportunities for the company. The macroenvironment analysis was carried out using the PESTEL analysis, and the microenvironment – using the five Porter forces. The VRIO method was used to analyze the internal environment, and the Bowman clock model was used to analyze possible strategies.
Based on the results of the study, the main threats and opportunities for the company were identified. Due to the high competitiveness and financial activity, access to the real estate market, which is new for JD Sports, looks favorable right now due to the specifics of the economic situation. Of the many external factors, the suppliers themselves and possibly political factors do affect the company.
The influence is associated more directly with diversification in the new real estate market than with the main activity of the retail company. The opportunities in this paper are described both for the main activity of JD Sports, taking into account the influence of external and internal factors, and taking into account diversification. The latter option may be the most interesting for the company, as it opens up opportunities for differentiating real estate according to various tasks of the leading retail activity.
Moreover, the development of the real estate market can provide the means to develop its own logistics system. In this case, it is necessary to pay more attention to R&D, which the company has focused on over the past two years. The analysis of financial indicators demonstrates the solid stability of the company, which in general opens up many opportunities that can level the dependence on suppliers and potential problems due to the consequences of the pandemic and the economic crisis. The company’s management needs to focus on ensuring that activities in the real estate market do not contradict the company’s reputation, vision, and mission, the requirements of social and environmental responsibility. All the factors, opportunities, and threats mentioned are discussed in more detail in the respective sections.
Introduction
JD Sports is a British company that distributes sportswear and accessories of various brands around the world. The first JD Sports store appeared in 1981 in the city of Bury, near Manchester (JD Sports – Our History, 2021). In October 1996, JD Sports Fashion plc entered the London Stock Exchange – by that time, 56 stores had been opened. The growth was fueled by the trend towards sportswear in everyday life: people bought sneakers not only for running but also for work and walking. Sales of brands like Nike, Reebok, Adidas, PUMA have grown enormously.
Organic development continued until 2002, when the first significant takeover took place, bringing JD Sports nearly 200 stores from the First Sport retailer (JD Sports – Our History, 2021). It was followed by more than ten different acquisitions, including those outside the UK. JD Sports has sponsored football clubs in England, Scotland, and Ireland. The company owners concentrated on owning sports and fashion brands, buying up stakes in brands such as Lacoste.
The company’s takeover strategy is still being observed. In 2016, apparel retailer Go Outdoors was bought for ÂŁ 112 million, the last major acquisition before the latest Finish Line in 2018 (JD Sports – Our History, 2021). Since fashion has always been one of the main directions in addition to sports, JD has many brands that are relevant to today’s street fashion, in addition to well-known sports giants – Tommy Hilfiger, Lacoste, and many others.
JD Sports’s forward-thinking business ability already fulfilled its role once when the company focused on streetwear. Having occupied a particular niche and achieved inevitable success in development, JD Sports requires new challenges, and therefore the company is going to diversify its business in the real estate market. At the moment, the main problems faced by the company are external factors that somehow affect globally. These factors include the pandemic and its consequences: low traffic to offline stores, interruptions in supply chains, increased prices, and reduced customer purchasing power; however, the company copes with them and makes record profits (Roberts, 2021). However, in order to deeply understand all the opportunities, threats, and possible obstacles, it is necessary to analyze the given company comprehensively.
External Environmental Analysis
PESTEL Analysis
As stated above, external factors play a significant role in this company. In addition, external factors should also be considered when planning JD Sports diversification, as internal factors do not play a vital role in the new field of activity. There is a PESTEL analysis for these purposes, which opens up opportunities for a comprehensive assessment of external factors that can affect the company to varying degrees.
The analysis will start with political factors that reflect the rules and requirements for the company at a sufficiently high level. The long-term profitability and market presence of a particular country largely depend on these factors. In several countries, the political system can directly affect the retail sector. Management, in this case, requires a careful approach and work with risks. As a consequence, JD Sports must consider the following political factors.
Firstly, it is the political situation in the country, confidence in the preservation of power, stability, and the risks of military invasion or civil unrest. Secondly, it is the specificity and role of the retail sector in the country’s economy – for example, what tax rate is levied on goods, how antitrust laws work, and what attitude is meant to import companies. The practice of import substitution exists in some developing countries, which is contrary to the current globalization trends but meets the requirements adopted due to the spread of the virus (Lupak et al., 2021). Considering the future diversification of the company, a parallel analysis of the real estate market as a whole is needed.
The political factors surrounding real estate in the UK are controversial. On the one hand, the government is always looking for an opportunity to stimulate the growth of the real estate market, making it easier for developers to create new real estate units in every possible way. Moreover, due to the pandemic, the authorities are trying to support small and medium businesses, including commercial real estate (Ahmed, Bangassa & Akbar, 2020).
However, the purchasing power of many people has decreased due to the restrictions imposed, from which the possible stimulation of the lower level of the market may cause a jump in prices, as a backlash from investors, especially those who invest for rent. As a result, JD Sports, with its capabilities, should enter the real estate market at a time when state support for developers is being organized, but measures are not yet taken to stimulate the purchasing power of citizens, since in this case, the price for buying real estate will be as comfortable as possible.
Economic factors often go side by side with political ones, which is confirmed by this case. The UK authorities are looking to introduce a tax on e-commerce as store traffic has dropped significantly due to restrictions (Agbo & Nwadialor, 2020). Many retailers favor such innovations, as they create a level playing field for shopping streets and online stores. For JD Sports, this fact does not pose a particular problem since the company operates worldwide delivery. The rate of inflation, unemployment, currency stability also affect the company’s activities. However, the main factor is still the economic crisis due to the pandemic.
Nevertheless, it was in 2019-2020 that the company managed to make a significant jump in sales, removing operating and net profit from the minuses (Macrotrends – JD Sports Financial Statements 2012-2021, 2021). At the same time, in this case, it is clear that JD Sports did not increase its debt, having received a large loan to overcome the financial crisis. It is evidenced by the preservation and even a significant increase in the ratio of total assets and a slight increase in total liabilities (Macrotrends – JD Sports Financial Statements 2012-2021, 2021). In parallel, there is a pretty natural jump in the company’s shares.
Government intervention in the market is limited to the above taxation. The company has achieved the efficiency of the financial markets almost to the maximum – in the UK, JD Sports has been developing for a long time and successfully, almost fully realizing its potential in its core business. The quality of the infrastructure in the field of retail trade in the UK is one of the best. As a result, this list of external factors, if it creates threats for the company, successfully copes with them. In real estate, the current dwindling purchasing power is partly a dual issue.
On the one hand, the situation is favorable for JD Sports, as many buyers have lost property due to mortgages; therefore, there are many offers on the market. On the other hand, investors are trying to preserve the real estate and now more often rent it out due to weak purchasing power. Given the fact that due to the pandemic, the unemployment rate in the country is growing, this trend may continue in the next few years.
Social factors played a decisive role in JD Sports’ success when the sporty style took shape. Since then, fashion is still a determinant in this category of factors; however, the company’s management has made a bet not only on sports brands. The company began to pay significant attention to social responsibility requirements in 2014 when the JD Foundation was founded. Since its launch in September 2014, JD Foundation has been committed to integrating social resources for social good, focusing on poverty alleviation, disaster relief, education, environmental protection, and social innovation (JD Sports – Social Responsibility Report, n.d.).
The demographic situation in the UK is standard, as is the average level of education and culture with modern trends. In general, social factors are essential for the company, and they should always be taken into account when conducting marketing campaigns and the current situation in the country, but at the moment, there are no threats in this area.
With regard to real estate and potential diversification, social factors also play an essential role. The primary determinant, in this case, is the labor market and its trends: the unemployment rate can induce people to start their enterprises, but only in the case of a favorable economic situation. Demographic trends towards an increase in independent living and the number of single-parent families lead to high demand for renting small premises, adjusting the secondary real estate market supply.
JD Sports uses advanced technologies for both offline sales and has an online store with convenient functionality. It is not uncommon for JD Sports to spend high amounts on R&D to maintain a competitive edge (Macrotrends – JD Sports Financial Statements 2012-2021, 2021). The company has established outsourcing for various purposes, in particular technological ones, which allows the company not only to use advanced technologies but also to reduce its costs (How A1 Technologies helped JD Sports save thousands in WAN costs, 2020).
Technologies in the real estate market open up access to a comprehensive and affordable choice for clients and more convenient access to the end consumer for real estate owners. On the one hand, customers receive more offers and a higher likelihood of going to competitors. On the other hand, the use of technology can be a decisive factor in developing a business in this direction. Leveraging JD Sports’ outsourcing capabilities can create a competitive advantage over other companies.
Given the long history of the company and the absence of damaging legal cases, external factors in the form of consumer protection, antitrust laws, labor protection, safety requirements, and much more do not pose a threat to JD Sports, which regularly adheres to these rules. Against the backdrop of the economic crisis, the increase in revenue for JD Sports is beneficial since, at the moment, the government provides more comfortable conditions for injections into the real estate sector. First, the mortgage rate goes down; real estate becomes more affordable. Second, the authorities are encouraging the construction of cheaper properties, offsetting builders’ profitability (Yousef, 2019). As a result, the situation at the moment is seen as favorable from the side of legal factors.
Finally, environmental protection or environmental responsibility of large companies is now a prerequisite for a good reputation. In previous years, JD Group has met all of its commitments under the Energy Saving Opportunity Scheme (ESOS) and the Energy Efficiency Directive (EED), helping to reduce environmental impact and improve resource efficiency in the UK and Europe (JD Sports – Environment Sustainability, 2021).
The company also reduces waste pollution through mixed recycling, reaching almost one hundred percent recycling rates (JD Sports – Environment Sustainability, 2021). In the case of a diversified company, it should be borne in mind that environmentalists are concerned about aggressive development in rural areas. In this case, JD Sports needs to look for possible grants that the government develops explicitly in order to develop abandoned sites, which, however, are located in less favorable areas (Yousef, 2019). In this regard, the company needs to find a balance between a potentially suitable location and environmental responsibility to maintain its reputation.
Porter’s Five Forces
Apparel retailing, even branded clothing, is always highly competitive industry. JD Sports’ main competitors are Academy Sports + Outdoors, Foot Locker, Zumiez, and Kanui. Given that the company specializes in more than just sports brands, other fashion retailers may also be on this list. Academy Sports + Outdoors has the advantage of much more extensive experience as the company has been around since 1938 (ASO – Our History, n.d.). However, JD Sports maintains the most significant turnover by a margin.
Threats from new entrants on this scale are not expected, especially given the following factors. JD Sports works with quite expensive brands, the introduction of new players in the market at the points of sale should have quite compelling arguments. Most brands have their own direct sales channels, so they are often not interested in expanding on a small scale. Considering the possible diversification of JD Sports, there is a significant advantage in terms of experience in the real estate market in a retail context. In addition, according to statistics, JD Sports began investing in R&D relatively recently, which provides an opportunity to unleash the potential of future developments in this area (Macrotrends – JD Sports Financial Statements 2012-2021, 2021). Improving its financial position, the company leaves almost no chance for new competitors of the same scale.
The supply chain is one of the most critical aspects of this business industry. The pandemic has nominally increased supplier power as restrictions and closed borders have put companies and suppliers in a difficult position. Prices for the delivery of goods have naturally increased. Considering that the company also deals with brands, it is not possible to substitute raw materials for another in this case. Successful brands such as Nike, Lacoste will only lose the established channel for selling their goods. As a result, we can conclude that JD Sports, as a retailer, is highly dependent on its suppliers; however, it overcomes the consequences of the pandemic brilliantly.
Buyer power is significant enough considering JD Sports has an advantage over other brands in the form of a loyalty program. Specific promotions, discounts, and offers, given the rather impressive capabilities of JD Sports, contribute to a constant increase in turnover and net profit from year to year. In addition, JD Sports uses the technology outlined above promptly, and as a result, quickly introduces new products. There is practically no threat of replacement since the brands sold by the company have established themselves in the market for a long time and firmly hold leading positions. The company can focus on service, not just products, and actively develop online sales to maintain momentum in and after the pandemic. Given the potential for diversification into the real estate market, JD Sports can provide itself with financial support in other business sectors, as well as improve its search for new solutions for its core business.
Internal Environmental Analysis (VRIO)
Finance is of the utmost importance to the company, as evidenced by the continuous growth of JD Sports’s various financial performances. The company’s long-term and short-term liabilities never exceed assets; the operating profit and gross profit are also constantly growing, which is essential for the retailer (Macrotrends – JD Sports Financial Statements 2012-2021, 2021). In addition, reputation is a valuable resource of the company since it works with high-quality brands, which means that it has a high responsibility for the products it sells. At the same time, the cost structure is not sufficiently valuable in the context of reputation and brand awareness since the cost of goods sold grows almost in proportion to the turnover (Macrotrends – JD Sports Financial Statements 2012-2021, 2021).
Considering social and environmental performance, the company emphasizes its employees as an essential value, but overall, employee satisfaction rates are lower than the average for retail and competitors (Whysall, Foster & Harris, 2019). Research and development are just beginning to be comprehended by the company and have excellent prospects for the future.
Given the scale of the company and its current success amid the global crisis, it can be admitted that the entire JD Sports movement is rare in its industry. The only exception is the products themselves, which can also be presented in other retailers or branded stores. As a result, only the organizational structure can be imitated, which is nevertheless quite difficult to achieve, and a set of brands of products sold. The company achieved tremendous success in the organization in financial activities, which signals a good experience of the company in the context of diversification. By leveraging its capabilities, JD Sports will leverage its strengths in financial management, an established supply chain, and a reputation to enter the real estate market.
Identification of Competitive Strategies
Considering all of the above and using the Bowman clock model, this section will cover the fundamental strategies. The low price for position two may be a strategy to deal with the effects of the pandemic. Given the potential for diversification, a strategy at position four should be considered, namely differentiation. Entering the real estate market can be pretty simple due to brand awareness and long-term leadership in the market.
The retail activity will be assessed from the financial point of view as the most enjoyable real estate for investors. The financial activity of JD Sports is exemplary – growth even in a pandemic and in a crisis. Consequently, it is necessary to consider the aspect of the sixth position of Bowman’s watches in the sense that the company can take different prices only at the expense of its reliability and brand. In addition, such activities will directly strengthen the brand itself in the markets, since now it is highly dependent on the products’ brands.
The study of the real estate market should precede any activity on it. JD Sports must clearly define a strategy that does not conflict with social and environmental responsibility or the company’s mission and vision. As a result, it is necessary to exclude the possibility of rural development. In addition, it is necessary to determine the purpose and purpose of the purchased property. According to the analysis above, now the most comfortable and favorable conditions for renting small businesses. This approach corresponds to the third position on Bowman’s watches, which implies a hybrid approach with low prices for a specific market segment with a high perceived value to the customer.
Strategic Directions
When concluding, one should distinguish between the directions of strategies for specific points. First, the company’s entry into the real estate market is now most favorable, especially if further growth in turnover continues. Secondly, as a consequence of entering this market, it should be considered a rental service and start at reasonably low prices. It is due to the low purchasing power of consumers, as well as the interest of small and medium-sized businesses in the field of inexpensive rent. Third, experience in the real estate market will expand the aspects of the company’s core business as follows.
By owning specific real estate properties, the company creates opportunities for a virtually cost-free way of opening new retail outlets. In addition, these commercial premises can be used as warehouses for their products, diversifying activities within retail. The use of warehouses opens up opportunities for the development of their logistics in order to ultimately reduce the share of outsourcing services by developing their departments. Ultimately, this activity will almost eliminate dependence on suppliers, their prices, and the supply chain. Further growth of the company is expected in the long term, since the development of new markets, in any case, may take time.
Recommendations
As a consequence of the strategies chosen, the recommendation for JD Sports will be as follows. Firstly, entry into the real estate market is now most favorable due to the current economic situation, when purchasing power has fallen, and mortgages cannot be redeemed. At the same time, the government does not provide direct support to citizens in buying new real estate, so there is a reasonably high supply with reasonable prices. It is recommended in this case to buy commercial premises, which can be helpful both for the main activity of a retail company and for leasing to small businesses due to their high demand. This direction opens up opportunities for creating our own logistics system, warehouses, diversifying retail and less dependence on suppliers.
Secondly, entering the real estate market will create a tangible superiority over competitors and even better stabilize the company’s financial situation. Considering that most of the potential directly in the UK has already been exhausted by the company, a sufficiently broad diversification, in this case, will bring a competitive advantage.
Moreover, brand awareness and international service experience can lead to selecting the strategy with the highest revenue price, provided that the perceived value to the customer is maintained at a high level. In the long term, this event will allow not only to preserve the current ratio of assets and liabilities but also to neutralize the possible consequences of the pandemic crisis, decrease in offline sales and increase in the cost of goods in the supply chain.
Conclusion
This paper has conducted a comprehensive study of JD Sports for potential diversification and entry into the UK property market. The company maintains a leading position in the market and, even in difficult times, continues to break records for increasing revenue. As a result, entering a new market can only strengthen the current financial performance and open up new development opportunities since, at the moment, the potential within the UK is almost exhausted to its maximum. A sufficiently bold diversification can bear fruit both in the company’s core activities and open up opportunities for creating its own logistics system, which is especially important in a pandemic to remain competitive.
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