The nuts and bolts of building a retail property — the entitlements, the financing, the leasing — aren't the difficult part of developing internationally. The tougher challenge for U.S. developers building overseas is navigating new cultures while maintaining their established corporate cultures and brands. And often, especially in emerging retail markets, the biggest challenge is building an organized shopping center culture.
This is a major shift from a decade ago, when concerns in investing abroad were centered on currency and political risks, and cross-border legal issues — not how best to be sensitive to new cultures and local tastes.
"Cultural gaps have a huge impact on your business as you expand internationally," said Morgan Parker, president of Taubman Asia. "American companies are the most impacted by cultural differences because their corporate culture and way of doing things are so deeply entrenched that when they expand internationally, they really feel the differences."
Of the major mall real estate investment trusts, Taubman Centers and Simon Property Group (and its subsidiary Chelsea Property Group) have the most prominent international platforms in non-Western and developing markets. Neither parachuted into a new country to build a mall; rather, all partnered with local developers to help execute their international deals and wade through new cultural waters, from identifying the appropriate sites and tenants to negotiating with government agencies and other vendors and with construction agencies.
Other major REITs, such as Forest City and the Westfield Group, have thus far avoided non-Western markets. Forest City recently opened an office in London to explore European development opportunities, and Westfield Group, the largest retail real estate owner globally, sticks closely to Western European, Australian and North American projects, primarily because of the absence of large cultural gaps.
Either strategy points to cultural differences as the major obstacle in expanding overseas.
"You can't go in as a Westerner and think you know it all," said Ross Glickman, chairman and chief executive officer of Urban Retail Properties, which develops vertical mixed-use centers for international ownership entities. "You have to put together a partnership or alliance with a local concern that stands with you on the ground, that helps take you through the exercise of understanding the cultural differences. You can't think that just because you've been successful here, you can be successful there."Taubman, while opening its Taubman Asia office, partnered with local developers on its two major Asian projects. E-Sun, a Hong Kong entertainment company, is its local partner on its Macau casino project, while Posco E&C, a Korean construction company that is a subsidiary of one of the largest steel producers in the world, is its local partner in New Songdo City, the $25 billion private development in South Korea.
Simon/Chelsea International opened in Hong Kong in 2005 to oversee real estate activities in Asia. In China, the company will launch projects in Changshu, Hangzhou, Suzhou and Zhengzhou in the next two years with its partners Morgan Stanley and Shenzhen International Trust and Investment Co. Chelsea Japan, its joint venture with Mitsubishi Estate Co. and Nissho Iwai Corp., will open Kobe Sanda Premium Outlets this summer. Shinsegae Chelsea, another joint-venture partner, in Korea, will open Yeoju Premium Outlets this summer also.
"Partner selection is a really important part of our process in expanding abroad," said John Bucksbaum, chief executive officer of General Growth Properties, which joined forces with local companies to open malls in Brazil and Turkey. "We've never considered doing anything without having a local partner. They're able to open additional doors within a given market, and then you can concentrate on the business."
Still, a partner can't do everything. Incorporating existing corporate culture into the local ethos is an executive task that requires both learning local norms, such as how to manage employees with a different work ethic, to etiquette and educating locals on the U.S. business model.
"We always felt it was important that everyone understood Taubman Centers to be a U.S. organization that would meet U.S. shareholder requirements and run the company in a U.S. way, which is very disciplined and sophisticated," said Parker. "But we also need be cognizant of the local market and how they do things."
This two-way street includes parallel challenges — managing the people and the product, which, in this case, is retail real estate.
Urban, which has development sites in Mumbai, Bangalore, Shanghai and Belgrade, handled the cultural differences by hiring international executives to work in-house — its head of international business, Tom Miner, led the first U.S. delegation of executives to China in the Seventies, and its head of Indian business, Sam Pitroda, is a well-respected Indian executive with ties to the Indian government — and bringing its local partners to its Chicago headquarters to train them."After we worked together in Chicago, we all went back to their camp and were able to more effectively divvy up the responsibility," said Glickman.
While building Taubman's Hong Kong office, Parker, who was hired by the REIT for his Asian business expertise, also put his new employees through an educational boot camp on how Taubman operates. "Local employees have a vastly different experience of shopping and working than international employees have had," said Parker. "Going shopping in a mall may seem like a fundamental aspect of American culture. But we are starting a company with people who may not have ever been in a shopping mall. You have to bridge a huge understanding gap that is simply the result of different upbringing."
And, of course, that lack of awareness extends to the corporate brand. "While in the U.S. we're a highly sought-after employer, we came to Asia with no brand recognition whatsoever," said Parker. "We had to start from scratch. And that's one of the major obstacles to overcome, because, naturally, there's a certain amount of mystery and suspect from local employees of foreign companies."
On the "product" end of the cultural divide is the actual property and the services offered. In Asia, for example, shopping centers devote up to 30 percent of the gross leasable space to food and beverage service, because the Asian social life focuses on mealtimes and people store less food in their homes; in the U.S., a mall might max out on half that much food service.
Overseas customers may be put off by mall conveniences such as gift cards, as Developers Diversified discovered in Puerto Rico, where giving gift cards is considered rude.
"We exported our successful gift card program to Puerto Rico, and it was met with resistance," said Daniel Hurwitz, the company's chief investment officer. "We adjusted by taking more time to educate people on the benefits of the gift card, and we've since revised our thinking and become more sensitive in the marketing of the gift cards."
The company avoided a similar mishap with its Brazil retail projects, however, by partnering with Sonae Sierra, a Portuguese company, to build its centers in South America.The actual architecture is also a matter of local tastes, regardless of the U.S. developer's brand.
"There are cultural design sensitivities that you have to pay attention to," said Glickman. "Though we're building mixed-use towers, we wouldn't exactly replicate Water Tower in Delhi. Being aware of local design sensitivities is a major, major focus."
At the same time, though, "a departure from what you know is just as dangerous as entrenching in what you know," said Parker.
"The prevailing school of thought used to be that you had to leave all your principles at the door and really be Asian-centric if you were going to build in Asia," said Parker. "And, clearly, if you bring a U.S. mall to Asia and dump it there, it will fail. But if you have a formula that works, you really can't forget about everything you've learned and leave it all behind."
The best bet is to bridge the desires of both cultures — providing the operational and development expertise cultivated in the U.S. and using the local partners to make sure that each development caters to local consumer tastes and fits seamlessly into local cultural norms, even as it adapts them.
As more developers are discovering, when they enter an unsophisticated market to capitalize on its emerging retail scene, they have a heavy hand in shaping the future of its retail. In fact, the task of navigating culture may become more one of creating a culture.
"The whole industry of shopping centers is very immature in Asia, and other parts of the developing world," said Parker, "so we and other companies like us that come here to build centers are part of developing a whole new industry. Your responsibility as a developer here is much greater."
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