Last week showed how the UK is just too small for its biggest retailers. Tesco made its grand US entrance, Marks & Spencer announced investment plans for China and India, and Carphone Warehouse is to accelerate its international push by opening 1,000 more stores in the US.
But, as many a chief executive has witnessed to their detriment, the challenges of retailing in international markets mean there is little room for error and it can go wrong – horribly wrong. Even the biggest retailers have a chequered history when it comes to exporting their store formats: Body Shop’s entry into the US nearly led to its collapse; Wal-Mart had to pull out of Germany last year; Dixons’ 1987 acquisition of Silo in the US led to write-offs of more than£200 million; and M&S – despite now having franchises in Europe – closed its predominantly wholly owned stores there six years ago, causing 3,400 redundancies.
Part of the reason for less than spectacular international success, or indeed complete failure, can be choosing the wrong market. Gavin George partner and head of retail at Ernst & Young believes there is a complacency trap. “There has been a tendency to be a bit arrogant and take what works in the UK and assume it’s going to work somewhere else,” he says.
However, Marks & Spencer chief executive Stuart Rose says past errors should not hinder future ambitions. “Just because you’ve had a car accident, doesn’t mean you shouldn’t get back in the car and start driving again. North America was a disaster, but Europe wasn’t. I’ve often said that, had I arrived earlier, I would never have retracted the European business,” he says.
Under Rose, M&S’s overseas business is booming and the plan is for it to contribute 15 per cent to 20 per cent of group revenues within the next five years. Rapid industry growth has resulted in a burgeoning luxury market in China and M&S’s research has revealed a gap in the market “for ordinary folk who want ordinary clothes”, says Rose. “We’ve got a place to fill in China. We can’t afford to ignore the big emerging economies.”
M&S’s research will without doubt have been extensive and the chances are that the chief executive with the Midas touch will lay the foundations for successful international growth. But many businesses have made mistakes by thinking that extensive research involves little more than glancing at competitor activity, overlooking a whole host of crucial considerations.
New Look consulted Ernst & Young to help it decide the six international markets it should set its sights on: Germany, Holland, Russia, Poland, the Ukraine and Singapore. New Look managing director for operations and international Carl McPhail says: “The parameters weren’t simply GDP and the size of the market, we went right into detail.”
The fashion retailer has traded in France under its Mim brand since 1988. Although successful now, McPhail admits the business was naive at the time: “We thought: ‘France is only 21 miles across the channel and that’s nearer than John O’Groats, so why can’t we do it over there?’” He says it made three mistakes: not understanding the country’s culture, applying a UK mentality to property acquisitions and not understanding French businesses’ people structure, which lead to a “risk of over-resourcing at a higher level”.
Go native
George says considering market synergies is vital. For fashion retailers, one is body shape, which is particularly different in China to Europe, for instance. Adapting the offer will always be necessary, but redesigning an entire collection is not viable. McPhail says: “We know we have to adapt to cultural differences, such as climate or sizings, but we will try to make sure adaptation is limited.”
Interestingly, some brands whose international expansion has been particularly successful have needed minimal adaptation. Mothercare has stores through franchised operations all over the world, from Armenia to Uzbekistan and Nigeria. Chief executive Ben Gordon says: “It has an enormous relevance wherever it goes, because it’s a classic example of a specialist brand. So, even if the name is not known, it usually starts trading very well early on.”
Claire’s Accessories, which has about 3,300 stores around the world on three continents, is similar. European managing director Mark Smith says: “We have to be flexible. For example, in Spain, you know the sunglasses season is going to last longer, but we reckon 70 per cent of our merchandise will sell worldwide.”
Jaeger chief executive Belinda Earl says that its brand segmentation, resulting from the introduction of lines such as Jaeger London and Jaeger Black, will work to its advantage when adapting for different markets. “We can edit our offer and this adds to our potential,” she says.
Planning for international expansion also requires active involvement at a senior level. Eversheds corporate partner and head of its China practice Andrew Halper is amazed at the number of businesses that send a few junior business development directors “to kick around for a while” in a prospective country. Chief executives and top-level directors should be the ones negotiating deals and making strategic decisions, he says.
AT Kearney partner Hana Ben-Shabat points out that research must be hands-on. “You have to go there physically to look at the stores, market research its customers and look at price points. Some retailers will even send their people to live with families to observe their lifestyles and see how they shop,” she says.
Failure to research a country’s culture sufficiently has led to many retailers’ downfall – not least US grocer Wal-Mart’s German venture. Ben-Shabat says: “It didn’t spend time getting to know the German consumer, who wasn’t excited by its broad offer. They were perfectly happy going to Aldi.” One of Wal-Mart’s many misjudgements was using the US custom of bagging groceries – a fundamental flaw; many German consumers do not like strangers handling their food.
IGD international programme manager Ben Miller is certain that Tesco has avoided the same trap as Wal-Mart. He says the fact that it has established an entirely new format – Fresh & Easy – for the US market reflects its ability to understand consumers and “create shopper-led propositions in every market in which it trades”. “Shoppers will find a store that is quicker and easier to shop in than a traditional American supermarket and contains a wider range of fresh produce than traditional convenience stores,” he says.
Another common mistake is assuming that blanket principles about culture can be applied throughout large markets such as China, Halper says. “You wouldn’t look at Europe and say that people in the UK are the same as the Spanish,” he says. In the same way, people in eastern China are not going to be the same as those in western China.
Equally important is knowing about the way in which people do business. But Halper warns against giving in to demands simply because they are perceived standard business practices. He points to the example of the Chinese preferring short-term contracts. “There is some truth in that, but asking whether they would prefer to work long- or short-term contracts is like a dentist asking if you’d like a short or long spell in the chair. Follow Chinese etiquette and traditions, but protect your interests,” he says.
Just as retailers can learn from others’ mistakes, they can also learn from successes. Euromonitor analyst Raphael Moreau says those pursuing international markets may want to invest close to home first to gain experience while minimising risk. “The consumers’ tastes there are quite similar to domestic products,” he says. It has certainly worked for others; Tesco in Ireland and Aldi in the Netherlands being just two examples.
Timing your entry is another consideration. Do you trailblaze to try to gain a dominant market share? Or do you wait for your competitors to educate the market first and potentially learn from their mistakes? Smith is a fan of the latter. “We would want to see a nice mix of fashion retailers around. Just as we want to be where Topshop, River Island and New look are in the UK, we want to be where the likes of Zara and H&M are in Europe,” he says.
Ernst & Young propositions development director Nick Williams says timing can depend on the product. Grocers – for whom good property opportunities are more limited – will never develop a dominant market position unless they are relatively early to market. Moreau agrees that not being able to find outlets to achieve economies of scale is a particular problem for the supermarkets. “That’s why the grocers are focusing on gaining leadership in those countries,” he says.
Williams says a lack of investment is another pitfall. “Many companies don’t put enough resource into international plans, from money to strategic thinking and staff. The argument back at head office is always: ‘It’s the UK that makes the money’.” When they start off it’s seen to be exciting for the brand, but it’s not properly resourced,” he says.
With proper investment and the right preparation, most brands have a good chance of making overseas work. But it might also be wise to exercise the cautious attitude taken by Earl. “We look at markets where there is the most awareness for the brand, the right location and the right partner. Everything has to come together and we turn down more approaches than we pursue,” she says.
Gordon says he is often asked whether there is any limit to Mothercare’s international growth. “The opportunities are enormous”, he enthuses. But, he adds, at the same time, maximum growth must also be gained from the UK. Memories of international disasters tend not to fade and the financial repercussions if it goes wrong are far worse than the pride-denting prospect of having to slink out with your tail between your legs.
Some considerations when choosing your market
Market attractiveness: How saturated is the market and what is the competition?
Population size and retail spend: Take into account those living in cities. China may have a population of 1.3 billion but, of these, about 800 million live in rural locations that will not have access to your brand.
Local transport infrastructures: India, for example, may have cheap labour, but the difficulty in
moving product around the country will cause costs to shoot up.
Finance: Can you make the economies work? In India, import duties are as high as 30 per cent. In
Russia, the cost of real estate is higher than the UK.
Speed of growth: How quickly do you want the business to take off internationally? In some of the
emerging markets in particular, it will take some time to build it to scale.
Finding the right partner: This is a big issue in emerging markets, where people are particularly entrepreneurial. You need a partner that has the capacity for growth, but is prepared to follow a ground plan.
International disasters
Body Shop’s foray into the US market nearly caused its collapse.
Dixons’ acquisition of Silo in the US in 1987 led to write-offs of more than£200 million when it was hit by recession and forced to withdraw.
Marks & Spencer, although about to re-enter the European market, had to close its loss-making European business six years ago, resulting in about 3,400 job cuts.
Grocery giant Wal-Mart finally admitted defeat in Germany last year after nine years of trading and sold its 85 stores to German rival Metro.
Laura Ashley’s US foray led to three profit warnings in a year.
Carrefour failed when it tried to export its brand to the US, closing its two US stores in 1993. It failed to do its homework and used a low-key French advertising approach to introduce it, the response to which was lacklustre.
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