International expansion: A world of opportunity for retailers

Go back only a few years and it seemed every retailer and his dog were looking at international expansion to replicate their homeland success overseas.

But then the recession hit and such ambitions subsided for many as they focused instead on matters closer to home. In the past few months - and despite the continuing fragility of the economic recovery and outlook in the UK - retailers are again looking at what the international route can bring them.

“It’s probably never been off the agenda for the strong players but during 2008-09 it was something that a lot of people put on the backburner. Now there is still an underlying nervousness but for companies that are performing well then international is becoming a priority,” says George Wallace, chief executive at international retail consultancy MHE Retail.

A growth story

For many, international expansion provides the growth story investors always chase. The effects of the recession have limited growth in the UK, not only because of expected reductions in disposable income through public sector job cuts and tax hikes, but also the abandonment or stalling of planned property developments across the country.

And this shortage of prime property extends to Europe too, highlighting a requirement for expansion further afield to generate growth.

“There is a slowdown in schemes being built across the Eurozone so space is very difficult to come by and international expansion becomes a more and more important part of the story,” says New Look group managing director Will Kernan.

Indeed, in this financial year more than half of the new space that New Look will open will come from overseas - half of which will be franchises and the other half company-owned stores. New areas of interest include North Africa and Southeast Asia.

International expansion has been a big part of the sales stories for many retailers, including the recently floated fashion chain SuperGroup.

“It’s a factor in a company’s valuation but people would probably look favourably on any retailer that has a strong potential in all of its areas so it’s just one component of a company’s performance,” says Planet Retail global research director Bryan Roberts.

However, it does not always go quite to plan. Pets at Home is another retailer sold recently with international expansion opportunities as part of its long-term growth story. But its initial foray overseas, to Australia, has been abandoned; and earlier this year its handful of stores in the country were transferred to a local retailer.

Similarly, Halfords has also retrenched the operations it had set up in Eastern Europe.

Playing the long game

At Marks & Spencer, international expansion is a long-term goal after its withdrawal from company-owned stores across Continental Europe in 2000 - a decision which it later admitted to be a mistake. International sales last year grew 5.7%, accounting for 10.2% of total group revenues - the retailer is aiming for 15% by next year. To date M&S has 327 overseas stores in 41 territories in places such as China, India and the Middle East, and opened 34 new international stores last year.

And Mothercare is one of the UK’s biggest retail success stories abroad.

It is focusing hard on expansion overseas with its franchise route to growth being one of the most aggressive of any retailer in the current climate.

For the year ended 2009 its international franchisee retail sales rose 40.9% to £404.2m. It currently has more than 600 stores in 51 countries under the Mothercare or Early Learning Centre brands.

So which route to expansion should retailers take? The franchise route remains an important one for retailers opening internationally because of the speed and de-risking it allows.

Others are buying into markets. Debenhams acquired the six-store Danish department store chain Magasin du Nord last November and is expected to continue with overseas expansion via the acquisitions and partnerships route.

Alliance Boots hopes to become the world’s leading pharmacy-led health and beauty group, which it hopes to do both through organic growth and selected acquisitions.

“Despite the challenging economic conditions, we are confident about our prospects for the year ahead and we continue to target selected acquisitions. We have rigorous financial and strategic criteria in place, as well as a strong cash flow and supportive shareholders to fund the right acquisition at the right price,” says a spokesperson for the pharmaceutical giant.

Its current focus is on the Republic of Ireland, the Gulf and growth opportunities in new high-growth markets such as Asia and Latin America.

The wholesale market also allows retailers to dip into new markets. In Italy Alliance Boots has struck a deal with Procter & Gamble to market and distribute Alliance Boots’ Laboratories Serum 7 anti-ageing range to Italian pharmacy chains. SuperGroup already wholesales in 33 countries.

Wallace believes there isn’t a right answer. “I don’t think that one size fits all. If you are a company of some substance and are in it for the long haul then it may be slower but doing something organically will long term give you bigger returns,” he says.

Others are taking baby steps overseas through their online offerings. John Lewis will make its first overseas foray by launching international delivery through its website from the beginning of next year. New Look now trades in nearly 50 countries through its website. “That has been a great indicator of demand and we have just opened in Malta because of the strength of the web. That went off like a firecracker when it opened in May,” says Kernan.

Mothercare will launch two international trial sites this year that will be based on a centralised site and support structure with the look and feel of Mothercare.com but localised to local language and fulfilment and will roll out further if successful.

International expansion is going to be important to more UK retailers in the next five years, but in most cases caution is being exercised and demand in individual countries is being closely analysed before retailers commit to major store opening programmes.

Where’s hot and where’s not?

Having decided that international expansion is back on the priority list where should retailers be looking?

● US

The US is proving a tough market to crack with more success stories of US retailers coming here than UK retailers going there. Wallace suggests that Jack Wills’ plans to expand into the market will be a good indicator of how well a UK brand will currently fare in the US market.

● EUROPE

The problems encountered in the Eurozone may put some retailers off - the cost of borrowing in such countries has risen dramatically as a result of the worldwide economic crisis. However, retailers are working hard to manage the problems there, with Marks & Spencer for example reacting to the downturn in countries like Greece and Ireland by ensuring competitive pricing and tight stock control.

But value retailers are seizing the opportunities for growth as cheaper property deals and shoppers’ hunger for value increases. In its first-half trading figures last month Primark said that its international business had been exceptional and after tests in places like Spain, Germany and Holland, many believe the retailer is looking for, and is likely to achieve, substantial growth in Europe. At New Look, although group managing director Will Kernan admits things have been tough in countries like Ireland, markets like France, which he says were tough about six months ago, are now recovering fast and he says Belgium has also been performing particularly well.

Central and Eastern Europe also still offer opportunities. M&S last year opened 16 new stores across the Czech Republic, Greece, Poland, Slovakia and Estonia. And Kernan says Poland has performed “out of its skin” for New Look.

However, the rest of the Europe - Germany, Italy and Scandinavia - is proving highly competitive according to George Wallace, chief executive at international retail consultancy MHE Retail. “There it is a harder act to pull off and you have to be quite exceptional to stand alongside retailers such as Zara, Carrefour and H&M, unless you have a real point of difference like Primark,” he says.

● RUSSIA

Going back a few years Russia was on many a retailer’s hit list but although they would like to expand there the practicalities can make it a different story. “It is quite a risky territory to invest in because there is still a lot of crime and corruption and it’s not an easy territory to exploit,” says Wallace.

Yet it is a market that is working well for Mothercare. Russia contributes the highest international sales numbers for the retailer worldwide and it will have 47 Early Learning Centre and Mothercare stores there by the end of the year with 10 new stores opening this year alone. The market is also outperforming for New Look.

● MIDDLE EAST

In the Middle East the financial crisis faced by Dubai has affected confidence for some. “The Middle East was very popular for franchise and remains a reasonable market but now Dubai has taken a tumble it is probably less attractive,” says Wallace. For Mothercare it remains a key area for growth with 196 stores across nine countries.

● INDIA AND CHINA

India is also proving a hotspot despite its different challenges. M&S has 16 stores in the country - four of which opened last year - through a partnership with Reliance Retail. “India is massively attractive still. The infrastructure will develop. You do have the problem of regulation but if you are a significant player then India and China are very attractive markets,” says Wallace.

A spokeswoman for M&S agrees: “The emerging markets offer good opportunity. We already have stores in India and China, and are looking at how we can better suit products to the market in India,” she says.

Like India, China is also emerging as a strong area for retail growth offering “great riches” for the world’s leading retailers according to Planet Retail.