How US retailers can crack the UK market

UK consumers are suckers for great US exports. And the Americans seem to love Britain too, as US retailers increasingly establish themselves here, upping their presence in the capital and around the country.

Last week it emerged the latest big US name plotting to open here is Victoria’s Secret, the lingerie retailer owned by Limited Brands.

And just last month Urban Outfitters’ stablemate Anthropologie opened its debut UK store on Regent Street - right next door to the new flagship of Guess, a more established US presence here.

They join US counterparts such as Banana Republic, American Apparel and Abercrombie & Fitch-owned Hollister, which all have stores in this country and plan more. So why this new wave of US retailers to the UK - particularly London - and what factors will determine whether they succeed here?

For fashion groups, the appeal is obvious. Limited Brands international executive vice-president Martin Waters told investors that as the “fashion capital” of Europe the UK was a key target for Victoria’s Secret’s international expansion.

But there are other reasons why US groups are eyeing the UK. As the US retail market continues to endure the effects of recession at home - many are still posting double-digit like-for-like sales declines - international growth becomes a more attractive proposition. As MHE Retail chairman Edward Whitefield puts it: “When your own backyard is covered in weeds, other markets are always going to be more attractive.”

With no language barrier and more cultural similarities than the rest of Europe, the UK is a natural first step for expansion on this side of the Atlantic.

But US retailers must also do their homework. The way the retail market works here is quite different, which can often be overlooked or misjudged and has, in the past, meant that much-anticipated openings have quickly fallen foul of the competitive UK sector.

Retail Knowledge Bank senior partner Robert Clark says the way US chains approach UK expansion can be off the mark. “They have a tendency to think global and not act local. Some US companies have not had a history of exporting their best talent and sometimes the management style is very different.”

Lessons of the past

One of the most recent entrants, Anthropologie, seems determined to avoid that. The retailer hired former Selfridges marketing director and Visit Britain chief executive James Bidwell as managing director of its European business. It has also said it would source about 20% of its products locally.

Similarly, US computer entertainment powerhouse Gamestop also chose local management for its move into the UK and Ireland, where it now has seven stores, and has taken the same approach across Europe.

Gamestop managing director of UK and Ireland Kevin Neary says: “It recognised early that it needed local management. It has been very understanding of the different cultures. If you just come here and replicate you are dead.”

Both will hope to avoid the difficulties experienced by others that have tried to pitch into the UK. One example would be Whole Foods, which is trying to compete in one of the most competitive UK sectors of all - grocery.

Last year Whole Foods made a £36m loss following the opening of its first store under its own name - its much-hyped flagship on London’s Kensington High Street. Whole Foods has admitted that it misread British shoppers’ tastes and is now changing to a more “convenience” offer, including ready meals that were introduced this month.

Planet Retail global research director Bryan Roberts draws a number of lessons from Whole Foods’ experience that are typical of the food sector in particular. He says: “The UK is a very competitive market and not as easy as some think. They think that coming here and doing what you do in the US is OK.”

He points out that one advantage they have domestically is sourcing power, but when they launch here they may not have the scale to secure similar supplier terms to their UK rivals.

And scale can be difficult to achieve. Roberts says: “It is very different at the superstore end, as it is historically difficult here to get sites, particularly in London where it can be quite a challenge.”

But for many US retailers, London is a key jump-off point not only for premiering in the UK but across Europe.

One US retailer that trades in the UK says London is a great place to start because of its breadth of cultures and nationalities and is a fantastic test bed for the rest of Europe. “It is an international hub and will continue to be a great place to pioneer international expansion,” he says.

The Crown Estate head of Regent Street portfolio David Shaw points out that many European shoppers are coming to London at the moment due to the weakness of the pound.

On Regent Street the landlord is trying to reduce the number of stores to allow more space in each unit, thereby enabling retailers to bring impressive flagships to showcase their brands.

“The first US retailer to do this was Nike at the east corner of Oxford Street because it wanted to directly represent its brand and its first overseas venture was London,” he says.

He says US retailers are often worried about the capital’s higher rents and which location is for them, but believes there are several US brands that could still find successful homes in London. “The density of turnover is higher in the West End than almost anywhere else,” he notes. He also says that if the Crown Estate thinks a retailer will be successful on Regent Street it will offer shorter lease lengths of just a few years as an enticement.

Neary says the cost and length of leases of property deals in the UK more widely shocks many US market entrants here. “The view in the US is that property is not an asset but a liability,” he says. “They have malls in the middle of nowhere but then someone else opens a few miles down the road that can kill it, so they do not sign long leases.”

The market in the US is made up of a great number of out-of-town shopping centre stores. “They don’t understand the concentration of retail in the UK with shops in big cities and even in smaller towns,” he says.

The ease with which even the most experienced US retailers enter the UK is often not straightforward. Clark points out that Best Buy has been slower off the mark with its openings than originally intended, and Gap has had a chequered history in the UK - it had to close a number of underperforming UK stores in 2007 and had mixed success with a European design team.

He adds: “US retailers underestimate the employment costs and the underlying operating costs tend to be a higher proportion of turnover than they are used to.”

US retailers also have to weigh up the best method of entry to the UK. Walmart bought its way into the UK with its acquisition of Asda rather than rolling out its own format here and the partnership has been highly successful.

Others trying to make their mark have had a tougher time and retailers including PetSmart and Talbots have come and failed to get purchase on the UK high street. PetSmart was eventually bought by Pets at Home and Talbots has left its Regent Street store.

Whitefield says the differing fashion trends in the UK mean that even if a business model is right the product may not be. “You have got to have a superior selling proposition.” He points to the success of Abercrombie & Fitch and says that when Victoria’s Secret arrives it has the potential to enjoy a similar success.

However, Clark warns that even a world famous brand such as Victoria’s Secret may find the competition from established lingerie big-hitter Marks & Spencer tougher than estimated.
But the UK more than ever seems to have an appetite for newness and US brands have as good a chance as any to make it work. But it is strong, well-researched retail propositions with sufficient local management insight that will have the best chance of success.