U.S. retailers entering overseas markets often overestimate or underestimate demand.
The misfires stem from a lack of knowledge about some of the business and political complexities and nuances of mostly uncharted territory. But that hasn't chilled the desire of most companies to tap into growing economies across the globe.
Take Brooks Bros.' opening day in Santiago, Chile, last April. "We were surprised by the depth of what was shopped,'' said Claudio Del Vecchio, president and chief executive officer. "Shoppers bought everything — shirts, suits, shoes."
Typically, a Brooks Bros. opening overseas is marked by far less exuberant spending across categories; shirt sales can comprise as much as 70 percent of the total. Shirts are less expensive than most Brooks Bros. products and readily identified as embodying the spirit of the brand, so they're an easy impulse buy, Del Vecchio explained. As customers become more familiar with the assortment, the selling evens out across categories, and shirts average out to some 30 percent of sales.
In Germany, Wal-Mart was far too optimistic. The retail giant was up against restrictive building codes, scarcity of land for new stores and a lack of a critical mass to leverage costs, a sluggish economy and, most important, tough competition from local chains Aldi, Tengelmann and Metro. Last July, Wal-Mart announced the sale of its ailing German retail business to Metro AG and took a $1 billion charge in the second quarter to cover the exit. Wal-Mart last year also left South Korea, where it was losing money.
But the world's largest retailer has fared better in Brazil, Canada and Mexico. And despite some setbacks on the world stage, Wal-Mart recently bought a 35 percent stake in Taiwanese retailer Trust-Mart, which will more than double Wal-Mart's retail footprint in China, and entered India with a retail joint venture with Bharti Enterprises Ltd., a New Delhi conglomerate. Under the deal, structured to capitalize on loopholes in India's restrictions on foreign direct investment, it is said Wal-Mart will provide logistics and sourcing expertise and Bharti will franchise retail units.
Gap Inc.'s international sales have been generating negative comps. To minimize risk, last year Gap shifted from a strategy of strict ownership of the stores to signing with franchise partners better acquainted with the markets. Deals have been struck in the Middle East and Asia. Gap still owns its stores in Japan.Saks Fifth Avenue had a different strategy. The company secured a prime piece of real estate in China for a 300,000-square-foot store, which will be the chain's largest location except for the Manhattan flagship. It's an historic building in the Bund district of downtown Shanghai. Initially, the plan was to open before the 2008 Summer Olympics in Beijing. But Saks hit a snag last month. Roosevelt China Investments Corp., which will own the store, said it terminated its sublicense agreement with I.T. Ltd., the company designated to operate the Saks unit. Now Roosevelt must find another operator, delaying the opening until 2009.
Undeterred, Roosevelt said it was considering additional licensed Saks stores in Beijing, Macao and other cities in China. Saks has two overseas stores, both licensed units, in Riyadh, Saudi Arabia, and in Dubai in the United Arab Emirates. Saks also plans to open stores in Mexico.
Other mass and high-end specialty retailers are pushing ahead with overseas expansion, following the lead of luxury brands such as Ralph Lauren and Brooks Bros., which have been targeting real estate in such high-end locations such as New Bond and Sloan Streets in London, Rue du Faubourg Saint-Honoré in Paris and the Ginza in Japan.
"There's definitely a lot of interest from American retailers looking to go abroad," said Robert Cohen, a retail broker at Robert K. Futterman Associates, who helped CP Shades enter the London market seven years ago, and recently landed Chrome Hearts a location on the Avenue Montaigne in Paris. "Chrome Hearts is considering other luxury streets in different European cities. They definitely have an appetite for more deals."
Last fall, Brooks Bros. opened a flagship on Regent Street in London, where it also has a smaller store. Flagships also opened in Paris and Seoul last fall, and two weeks ago, another flagship opened in Milan.
Abercrombie & Fitch opened a London flagship last month on the corner of Burlington Gardens and Savile Row.
"Our long-term goal is to roll out stores, and we are working on it," Michael Jeffries, chairman and ceo, said at the launch. "But we're not looking for world domination. We want the business to grow naturally, and we're humble — and cautious — in whatever we do."The youth specialty retailer is searching for a flagship site in the Ginza or Omotesando sections of Tokyo, and will have a local manager to supervise future A&F stores in Japan. Abercrombie envisions a multi-level Tokyo unit of more than 20,000 square feet opening in fall 2008.
Last year, three Abercrombie & Fitch stores and three Hollister units were launched in Canada. "These stores really surprised us," Michael Kramer, A&F's executive vice president and chief financial officer, said at a recent Bear Stearns' Retail, Restaurant and Consumer conference. "We anticipated them opening to great volume, but not anywhere near what they did. These stores have not slowed down to any lower than three times our average store here domestically and they continue to perform."
As a result, Hollister is accelerating its international rollout. Hollister is targeting malls, while the Abercrombie & Fitch brand is focused on measured development of big flagships on prime real estate in major cities.
"You have seen a lot of retailers laying on the side of the road in terms of their international development,'' Kramer said. "Why? Because they went in there and one day they woke up and said, 'I want to be international,' and it was really more of a marketing ploy than a profit ploy. You can ask them whether their hurdle rates were the same or how much more diluted were they, or did they really bank on the future. We are not going to do it that way. We are going to be slow and measured and try to develop relationships with not only brokers but these owners and developers, to be able to get in on the ground with regards to Tokyo, Milan, Madrid, the U.K."
He added that the merchandise was not going to be at all different from what's in U.S. stores. "What has made us successful is that we are a Western brand."
Distribution is one of the challenges of Abercrombie's overseas strategy.
"Until we really get a full understanding of what our business is and in terms of the quantity, we are outsourcing our distribution center to a third party,'' Kramer said. "Most of the product that is going to be in the London stores is going to be shipped to the U.S. and then shipped back over. China, because of customs, we are not able to."Another U.S. giant, Target, had resisted publicly talking about international growth — but no longer.
"It makes sense five to 10 years down the road," Robert Ulrich, Target's chairman and ceo, told analysts last week. Target would consider India and China when the populations are more affluent and educated. And Canada has been on the radar for a decade. To enter that market, Target would need to take over a large cluster of stores from another retailer, in one block, he noted.
Urban Outfitters is making inroads in Europe. The retailer has three stores in London, and one unit each in Dublin, and in Glasgow, Manchester and Birmingham in the U.K. The company opened a store in Stockholm and another in Copenhagen last year. In the fall, Urban launched a European market Web site. The five-year objective is 30 to 40 stores across the Continent. The company, which has favored high street locations, will begin situating stores in malls in the fall, at Bluewater in Greenhithe, a London suburb, and at the Dundrum Shopping Centre outside Dublin. The company is also firming up plans to enter Germany and Belgium.
The key to success abroad, said Ted Marlow, Urban Outfitter's president, is "understanding the market from a local perspective." A buying staff, based in London, complements Urban's assortments with local products. "In Denmark and Sweden, we've tried to have a lot of sensitivity to different cultures. We look for individual lines or designers that are popular in the market."
Christine Chen, vice president of equity research at Needham & Co., cited three top retailers for their aggressive international expansion: Guess, Abercrombie & Fitch and Polo Ralph Lauren. "These retailers are going international because they are looking for growth and realize that brands are global, thanks to the Internet and technology.
"Another retailer who you wouldn't really expect as an international figure, but is really pushing overseas expansion, is Urban Outfitters,'' Chen said. "They already have stores in Europe and Canada and have seen tremendous success in these locations. I expect they will also eventually move to Asia, as well.
"None of these retailers I mentioned are anywhere near saturation in the U.S., but they don't want to fall into the trouble Gap is seeing — getting too big and then struggling, looking for areas of growth. Retailers want the best locations overseas, but space is limited and they need to get in early or other retailers will snatch up the real estate. Guess and Ralph Lauren are partnering with licensees to help negotiate the real estate transactions, since locals are able to get better deals and know the area."As for Brooks Bros., door to door overseas, the styles don't change and the woodsy, polished look of the store stays uniform, though the product mix may be different. However, the operating strategy is tailored to the market. It's a combination of company-owned, joint ventures, wholesaling and shops-in-shops. "When you decide to open more stores, you have to trust some local expert. That's why we don't mind partnering with a local partner," Del Vecchio said. "In London, we have partnered with a strong local developer and operator of other stores.
"We are not tapped out in the U.S.," Del Vecchio continued, "but certainly the long-term potential is less here than internationally." Brooks Bros. operates 105 full-price stores in the U.S., and has room for another 30 to 40. Overseas, Brooks Bros. operates 121 stores. Key markets are Japan, where there are 70 full-price stores; China, with 14; Taiwan with five, and Italy and London with two each.
"We expect the U.K. to become a very important market, shorter term,'' Del Vecchio said. "Longer term, Hong Kong and China is the biggest opportunity. Five years from now, it will be a very different world market. The priority now is Europe, which is ripe and ready to embrace the Brooks Bros. brand." — With contributions from Sharon Edelson and Jeanine Poggi
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