Matt Clark, director at UK management consultancy, Boxwood, on the opportunities and obstacles to international retail expansion
Many UK retailers have already expanded extensively overseas and, if you listen to the press and pay attention to conference speeches, this is a ‘must do’ activity for retailers that want to grow. However, many of the retailers that have expanded have not enjoyed the experience.
Hence our question: is international expansion an essential growth strategy or an ego trip for the leadership team that distracts the organisation? Of course the answer is – depends on how you do it…
Potential for distraction
With weak consumer confidence, intense competition and disruptive technology now business as usual in the UK, it is essential to focus on what you really need to do to be successful. Wasting time on the wrong strategy when core business is volatile and headcount is tight will kill you quickly.
Not Fresh or Easy
Tesco has had a challenging time in recent years in the UK market. Has the effort to expand in the US with the Fresh & Easy brand been a distraction? Tesco’s retreat from the US having invested over £1bn and lost almost £850m, while the CEO, Phillip Clarke, personally focuses on turning round the core UK business, suggests this is the case.
Many UK retailers may have suffered from this issue. Both Tesco and Mothercare are examples where you could argue that the focus on international expansion has contributed to losing out in the core UK market. The reality is international expansion is rarely a solution for weak home market performance and, by distracting the leadership team, can directly contribute to poor performance at home.
If you do go international, how do you actually make money?
Many retailers, especially in apparel, have successfully expanded overseas. However, this is a long-term game and short-term returns are in short supply. Most have used franchise or licence business models to expand rapidly and the returns are much lower than wholly-owned operations. Of course, the risk is also lower and the brand and buying benefits of scale are not to be dismissed.
Whole Foods Market’s winning US business is based on large stores with plenty of car parking allowing shoppers to take full advantage of this ‘palace of food’. Not easy to replicate in central London where the UK pilot store opened in 2007 but has yet to turn a profit.
Other retailers have managed this differently, with greater success. Paul Smith, the fashion brand, is a good example. Here is a retailer that has taken the cultural element of foreign markets on-board during international expansion and delivered real success as a result. When Paul Smith expanded to Japan it employed a designer specifically to work on that market and create products to fit the Japanese body shape and fashion trends.
Choosing the right business model is imperative and your choice is almost endless. Wholly owned, joint venture, franchise, wholesale, shop-in-shop, online only and licence, to name just a few. The trick is to work out the highest priority markets where your core value proposition will be successful and the market offers opportunities for a significant return. Then you need to choose the right business model that delivers the optimum reward at an acceptable level of risk and investment. This is a complex and often iterative exercise. Core to this exercise is a detailed understanding of what differentiates your proposition for the customer and check thoroughly this fundamentally works in each target market. While local ‘tweaking’ of the offer is usually required and desirable to maximise sales, it is very difficult to reinvent your core value proposition in each new market.
So we know where we want to go and how we will make money, now what…
Detailed assessment of each market is imperative. In many categories it will be necessary to tailor your offering in order for it to be successful in a local market. Local consumer preferences, cultural differences, seasonality, regulation, tax and duties, quality of local partners, sourcing restrictions and local competition all need to be considered. Work out what you absolutely must do to be successful, plan its implementation in detail and ensure it does not mean you will lose money. Beware over-doing localisation though; the resulting complexity could really slow you down.
Complexity: it will kill you if you let it
Often UK retailers that expand overseas find they soon get a real tension between the people running international and the teams delivering (all the profit) back home. This is because a business that has been optimised to serve a single market is unlikely to be agile enough to cope with the demands of different business models around the world, all pulling in different directions at once. The complexity introduced by serving multiple markets can overwhelm staff and IT systems alike. At some stage it will be necessary to redesign how the business works so it is fundamentally flexible enough to deliver for each different market and still be profitable. This is often a huge investment in time and money and must be planned carefully.
Given all this complexity, do I really want to do this?
International expansion is not the only growth strategy available. In many cases doing something at home can be a much faster, more profitable and less risky way to deliver growth targets.
You are not short of choices: channel expansion, product category expansion, launching complementary services, opening up new B2C and B2B segments for your core proposition – these and more are all available. International must be considered and prioritised against all these other opportunities and only selected on its comparative merits. Only launch international expansion as a strategy if it is one of your top three growth priorities, otherwise it will not get the attention required to make it successful.
Remember, execution is everything…
So, we are on the journey. We have selected the market where our offer has the best chance of success, chosen the right business model, sorted out the details of how we are going to serve the market and convinced ourselves that this is a top three growth priority. What could go wrong? Everything.
The tedious reality of implementing a complex project like international expansion is it needs a huge effort to get it right. Proactive and prolonged leadership attention, significant human and financial resources, extensive investment in relationships, the ability to change course quickly when things are not going well (inevitable at some point) – it all needs to happen. The most important thing however, is focus. Remember, less is more.
Human nature and impatient shareholders will always push leadership teams to take on too much at once. International expansion is a great example of where that is a seriously bad idea. It is imperative to take a measured approach, plan the changes to your operating model, stay agile as you learn what works in new markets and modify your approach. Remember, it’s a long term bet that only pays off if you plan and focus on it. Don’t let vanity get in the way of good business sense.