Given the troublesome domestic market, U.S. fashion companies should look to one man for salvation: David Hasselhoff.
In what futurist Edie Weiner calls a new era of aesthetic democracy, American brands are rushing to counterbalance the slowing domestic market by moving into undeveloped regions abroad, especially Europe. And in that regard, Hasselhoff is a case study. While the kitschy actor’s star faded along with “Knight Rider” and “Baywatch” in the U.S., he retained much of his popularity in Europe, where he was seen more as a singing sensation and sex symbol, noted Credit Suisse analyst Paul Lejuez.
“We believe that Hasselhoff’s popularity (or lack thereof) is relevant for the investment community, as it highlights how different tastes and preferences can be in the U.S. versus Europe,” Lejuez said. “Several brands, such as Esprit and Tommy Hilfiger, once enjoyed great popularity in the U.S., only to fall out of favor later in their life cycles. Despite the loss of brand cachet in the U.S., however, these brands remained well accepted and fashionable in Europe.”
The weakening of the euro against the dollar (see related story, opposite page) over the last few weeks has only added urgency to American firms expanding into Europe. Growth-driven public companies have come to recognize they no longer have the luxury of relying on a single market, even the $10 trillion U.S. consumer economy.
That realization led to Phillips-Van Heusen Corp.’s $3 billion acquisition of Tommy Hilfiger and is causing other U.S. vendors to look at merger or acquisition opportunities in Europe. It’s also pushing specialty retailers to expand overseas, either via franchise deals or on their own.
“One way or the other, strong companies — PVH, Tommy, Warnaco, VF, the kingpins, so to speak — are having to diversify their portfolio to compensate for the fact that the U.S. is a maturing market,” said Arnold Aronson, managing director of retail strategies at Kurt Salmon Associates and former chief executive officer of Saks Fifth Avenue. “Acquisition is a way to accrue real estate locations that it would take years and years to develop on your own.”
Still, branching out across borders is a delicate operation and there are plenty of examples of even strong companies faltering as they try to replicate the success they’ve had elsewhere.
“You can’t just put your brand through a Xerox machine and keep replicating it,” Aronson said.
Even the world’s largest retailer has struggled in the transition from tourist to local.
Wal-Mart Stores Inc. pulled out of Germany in 2006 following years of losses. The discounter has also taken the slow approach, acquiring a 6.1 percent stake in Japanese chain Seiyu in 2002 before taking majority ownership in 2005, although that effort has also been somewhat troubled. Wal-Mart’s purchase of British food and apparel retailer Asda has gone better, though, and Asda last week further expanded its footprint in the U.K. by snapping up the British operations of Danish retailer Netto.
Cross-border growth can be daunting, however, meaning the go-slow approach is attractive to many. Limited Brands Inc. this year entered into a franchise partnership with M.H. Alshaya Co. to operate stores in the Middle East; Gap Inc. has signed franchises in a number of countries to open some of its nameplates, while a string of firms from Hilfiger to Polo Ralph Lauren initially signed distribution deals in the Far East outside Japan before, in recent years, taking those businesses back in-house.
“Companies are generally gun-shy about going abroad,” said Gilbert Harrison, chairman of Financo Inc. One way to dip a toe in the water is to expand via e-commerce, which Harrison said was “very inexpensive, but a good way for a brand to go.”
This is exactly the strategy J. Crew is following with its deal with British e-tailer Net-a-porter.com, which makes the U.S. retailer’s collection accessible to 170 countries via that Web site.
And with millions in U.S. corporate coffers and the financing markets eager to lend again, more cross-border acquisitions as well as store rollouts are likely — although it’s uncertain as to when, given the stock market’s recent gyrations and potential change in sentiment about the global economic recovery.
Brands are also being pushed into new markets — as well as into opening their own stores — as retailers consolidate and emphasize exclusive agreements.
“International is one option, particularly for a lot of U.S. players, that may prove attractive,” said Andrew Martin, a director in Robert W. Baird & Co.’s investment banking group. “A lot of companies that have been beholden to department stores [in the U.S.] are saying, ‘We need to find ways that protect our revenue base.’”
Those brands and brick-and-mortar retailers who do take on international expansion find themselves in a world where both the customers and the rules of the retail road are different. Many requirements, such as “key money,” or extra payments to European landlords, seem strange to Americans and can make expansion all the more capital intensive.
“The hardest thing to adjust to is the fact that in America, things are pretty consistent, and in Europe, every city, every country has different customs,” said Laura Pomerantz, a principal and founding partner at PBS Real Estate, who has helped retailers such as Abercrombie & Fitch Co. wade into the market.
Retailers in a rush could snatch up a European retailer to achieve a certain critical mass immediately, especially given the recent robustness of the dollar against the euro.
“Certain companies will consider buying a retailer that’s already in existence that has the size store they have so they can jump-start [their expansion],” she said. “There are some people out there actively hunting for possible companies that have decent real estate.”
Yet, even though the “aesthetic democracy” taking hold around the globe could aid brands as they venture overseas, the ever-continuing push to grow bigger might also trip up companies that take that expansion too far.
“From a branding perspective and an aesthetic perspective, the world is shrinking,” said Weiner, president of Weiner, Edrich, Brown Inc., pointing to the Asian thirst for Western brands and the increasingly plugged-in youth culture.
“Going global can compromise brands, whether they’re known for their design, their quality or their exclusivity,” Weiner said.
“Brands lose some of their competitive advantage by claiming an authentic heritage, because there’s no authentic history when you start merging brands into a big conglomerate,” she said.
Firms might have no choice, however, given the pressure to diversify their businesses and grow the top line.
“If you’re looking to increase your sales volume, a new market ramps that up pretty quickly if you pick the right brand,” said Philip Bleser, managing director and ceo of midcorporate banking at J.P. Morgan Chase & Co. “There are great opportunities internationally for companies looking for European consumer distribution.”
But perhaps it is the companies that have already earned their international stripes that are best positioned to heat up the global M&A scene.
“There will be certain strategic deals that make sense for companies to do as they leverage their global platform,” said David Shiffman, managing director and head of retail and consumer products at Miller Buckfire & Co. “International is an important element of retailer strategies, especially those who are maxing out in the U.S.”
And the interest in growing a broader base could bring about the oft-discussed, but rarely realized, expansion on the other side of the Pacific. Observers said China has at last begun to take off, while companies also are looking to Russia, India, Turkey and Indonesia.
Wal-Mart, which has strong operations throughout the world, has long been said to be looking at acquiring a presence in Russia, but the rumors run hot and cold depending on the political climate in the country.
“Asia tends to be more exciting for companies just purely given the growth prospects there. Europe is a pretty mature established market where the growth hasn’t been necessarily as robust,” said Carrie Barber, director in Credit Suisse’s retail and consumer investment banking group.
“The emphasis is on company diversification and that means getting into new markets and different channels of distribution,” said Barber, who worked with Apax Partners and Tommy Hilfiger on the PVH deal. “It can happen through M&A. It can happen through joint ventures and it can happen organically. All aspects of the financing market appear to be open and they generally are going to react well to financings for strategic M&A.”