Ted Baker Plc is a London Listed Retail Finance Essay

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Ted Baker Plc is a London listed retail company. The company is headquartered in London and has operations in other European counties as well as US, Asia, Middle East and China. The company had gross revenue of £215.625million, a 15% jump from the year before. However, the profits for the year remained significantly unchanged at £17557, a 1.6% rise from the previous year. 85% of the total company revenue came from United Kingdom and the greater Europe with the rest coming from the US (12.9%) and Hong Kong (2.1%). By virtue of the company’s overseas holdings, it is exposed to a number of risks. These include strategic, financial, operational and political risks. According to the firm’s latest annual report for the year ended 28 January 2012, the risks pose a significant threat to its performance and can inflict material changes to financial statements in the year of their occurrence. Most importantly, the firm has to measure the probability of their occurrence and mitigate against their effect on its bottom line. Country risks As mentioned, Ted Baker operated in a number of countries. Each of these countries posses specific country risks to the firm. To begin with, the firm faces a number of country specific risks such as blockage in transfer of funds as well as cultural and institutional crash of norms. For instance, Ted Baker’s Chinese operation faces a number of transfer restrictions from the country. That means that the company might have trouble in repatriating profits realized from there. To mitigate against this risk, the company has set up operations in Hong Kong, a relatively secure destination with minimal restriction on the transfer of capital and profits in and out of the country (Ted Baker Inc., 2012). Operations in a foreign country must observe the rules and regulations relating to ownership of business. In most of Ted Bakers operating countries, 100% ownership is not permissible. Therefore, local residents have to be included as strategic partners in the organisation to facilitate licensing by authorities. This dilution in ownership leads to weak control of organisational strategy. To mitigate against these risks, the company assesses its entry strategy n a case-by-case basis to ensure that the local investors in the target market add value to the management team. In most cases, the company acquires already established companies with their entire supply chain intact and retains some minority shareholding to ensure that it maintains the needed legal and regulatory threshold. Another country-specific risk that the company faces relates to human resource norms in the foreign operations. Since it is a UK company, it is used to having employees with flexible work schedule. However, the Middle Eastern workers have the right to take extended break during working hours to observe their religious rituals. In the same way, American workers have very strong labor unions that have very strong ability to bargain for higher wages through industrial action. These factors pose enormous risks to the company and can result in material losses in those markets. Ted Baker also faces the risk of protectionism in its key markets. This is particularly so in the United States in the wake of the financial crises. USA is keen to protect its local industry and has therefore increased its non-tariff barriers for goods manufactured elsewhere. This increases the cost of doing business and erodes the business’s competitiveness in the American market. Ted Baker also faces risks relating to nepotism and corruption in its operating markets. In the Middle East for instance, executives hire employees based on kinship and other affiliations as opposed to merit. This makes it hard for the organization to attract and retain the best talent as hiring is best on referrals and not merit. It also opens up avenues for conflict of interest and outright corruption by the executives. Given that these executives are part owners of the company as mandated by law, the company has no choice but to retain them. Most importantly, Ted Baker faces the risk of loss of intellectual property from its operating markets. This is especially true given that most countries require a mandatory percentage of local ownership in order to pass on expertise to them. In Hong Kong for instance, intellectual property rights are rarely enforced. Locals can steal proprietary design information and use it to make their own products. This poses enormous risk for the company. Country risk is higher in cases of long-term investment that are not made through a regulated market. Given the nature of entry the Ted baker uses in establishing its operations (mostly mergers and acquisitions), and the long-term nature of its investments, the company is exposed to high levels of risk. Worse still, most of the country risk elements that the company faces cannot be hedged effectively. This means extreme loss in the event of such risk crystallizing (Ted Baker Inc., 2012). Political risk Political stability is crucial to a firm’s sustained growth and profitability. Political instability in the Middle East poses a major problem for the firm. Following the Arab spring in the last few years, the firm experienced disruptions in supply chains in the region. This led to high operational costs and outright losses in cases of shutdowns (Ted Baker Inc., 2012). Ted baker assesses political risk at two levels: Macro and Micro. At the macro level, the firm’s management assesses the host country’s attitudes towards foreign investors and political stability. If the country is hostile to foreign investors and has a degree of political instability as indicated by civil strife or other indications, the market is considered unsafe and not worth investing in. Only countries that have relative political stability and that are friendly to international investors are considered targets for investments. At the micro level, Ted Baker assesses whether its activities can conflict with the target countries existing regulations. However, this is not sufficient in the face of a changing political landscape as is the case in most of its operating markets. The management anticipates the likely effect of changes in the political landscape on the operations of the firm. In all the markets that the company has operations, the firm has minimal political risk at the micro level. This is because of its effective corporate governance structure that guides its operations (Ted Baker Inc., 2012). As detailed in its final report, Ted Baker relies heavily on effective corporate governance to stave off most of micro level risks. The principles of corporate governance guide its operations in all markets and this minimizes the chances of going against the rules and regulations. in particular, the company observes all rules of accountability (appropriate board size, transparent ownership, ownership neutrality and defined board accountability), disclosure and transparency (broad, accurate and timely disclosure using proper accounting standards), independence (independent audits, dispersed ownership, independent oversight, independent directors) and shareholder equity (one vote per share) (Ted Baker Inc., 2012). Ted Baker has an insurance policy against political risks. Under the policy agreement, the company can claim compensation for occurrences such as inconvertibility, expropriation and loss of income from political violence. This is the most effective hedge against these risks. Ted Baker is also exposed to currency and exchange rate risk. This mainly occurs on purchases denominated in USD and Euros. The group also publishes its final accounts in sterling pound and it therefore incurs some losses in translation. To mitigate against these effects, the company used financial instruments (hedging) (Ted Baker Inc., 2012). Conclusion Ted Baker Plc has operations UK, France and other European counties, USA, Asia, Middle East and China. Most of the company’s profit is derived from United Kingdom and the greater Europe with the rest coming from the US (12.9%) and Hong Kong (2.1%). Due to its international operations, the firm faces a number of risks both country specific and firm specific. These include transfer risks as well as cultural and institutional risks. The company has insured itself against most of the country specific risks. It leverages on strong corporate governance structures to avoid micro risks. Ted Baker’s exposure to currency and exchange rate risk due to transactions done in different currencies as well as and translation of financial data to sterling pounds results in losses for the firm. To mitigate against these effects, the company uses financial instruments to hedge e its exposure.

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