Lured by the prospect of untapped markets containing millions of consumers with money to spend, American retailers are pushing into international markets.
Ethan Allen, for example, now has a store in Egypt, one of nearly three dozen overseas. "Because of our variety of stylish product designs and exceptional service, our international business has been quite successful," says Faroq Kathwari, chairman and CEO of Ethan Allen Inc.
Ethan Allen is not alone in seeking to grow by opening stores in faraway lands. NikeTown recently opened outlets in Berlin and London. Home Depot continues to expand operations in Chile and is reportedly scouting locations in neighboring Argentina.
Almost every country around the world has been invaded by U.S. retailers or restaurant chains, says Jeffrey Rosen, development director for the International Retail Development Services Group (IRDS) of Los Angeles-based CB Richard Ellis. The IRDS, a retail and entertainment development management consultant, has more than 4 million sq. ft. of retail and entertainment malls under development in Taiwan and India.
"For certain retailers, including food-and-beverage and entertainment concepts, many U.S. markets are so saturated that future growth must come from overseas expansion," Rosen explains. "In addition, the increased travel by residents of other countries during the 1980s and 1990s, coupled with the enormous exposure impact from the Internet, means U.S. brand names and celebrities are well-known, even in rural areas of China and India."
Stanley Eichelbaum, president of Marketing Developments Inc., a Cincinnati-based development, research and marketing firm, agrees. "Certainly, fast-food companies have been the forerunners of global expansion," he says, "led by Pepsico when it was in fast food, and by McDonald's. Toys 'R' Us was a visionary, too."
Friendly territory Overseas markets such as Latin America are attracting retailers simply because they are becoming too large to ignore, says Mike Burkard, editor of the Santiago, Chile-based Andean Retail Report, which follows the industry.
"Most Latin American countries are highly urbanized, and the bulk of future job creation is likely to go to these dominant cities," Burkard says. "Many retailing categories are still highly fragmented. The economies in many countries have stabilized, especially Chile. Mexico has done well recently despite the nearly worldwide recession, and Argentina is holding on despite difficulties caused by Brazil's devaluation."
The Caribbean, too, offers a broad international customer base and exposure for retailers, says James de Winter, CB Richard Ellis' director of retail services for Latin America and the Caribbean, based in the firm's New York office.
"New tenants offering a new or broader selection of merchandise are welcomed," he says. "For many retailers, their first, and often multiple, location in the region is Puerto Rico, which has a well-developed and established retail sector with strong consumer demand. Countries that have attracted a good mix of international tenants include St. Martin, Barbados, Antigua, Aruba, St. Lucia and St. Barts."
In fact, because a retailer has to make itself friendly to a culture, Eichelbaum adds, some retailers have made their initial offshore forays into friendly environments such as Puerto Rico.
"This allows them to start experimenting, or learn about transport of goods," he says. "The country has a U.S.-friendly legal system and uses the dollar. One project, Plaza Las Americas in San Juan, has attracted expansion-minded retailers as a major testing ground and is now undergoing an expansion."
Devising a strategy Such experimentation may be wise, because while the overseas markets are appealing, opening a store in Prague isn't as easy as opening one in Pittsburgh. A U.S. retailer must be ready to tweak its concept on the fly and answer its customers' needs.
"Another important aspect to recognize is the local competition and its customer loyalty, credit facilities and store base," says Burkard.
Such obstacles can be overcome by retailers setting up joint ventures upon entering a new market. "Home Depot partnered with Falabella in Chile but will be opening on their own in Argentina," he says. "Office Max has partners in Brazil and Mexico. Costco also has a partner in Mexico."
Analysts say some retailers focus on creating a critical mass of stores in one country before moving on. For example, Gap and Eddie Bauer have been successful in Japan and are concentrating on building up their Japanese market penetration before doing the same in markets such as Taiwan and Korea, brokers say. Others have opened at least a flagship store in several countries. The country strategy often reflects the type of market entry chosen by the U.S. retailer.
"If the retailer is intent upon owning and operating its concept in a foreign country, it might take a more conservative expansion route," says Rosen. "If it finds a strong local partner, the expansion may go more quickly and cover a larger region within Asia. Unlike the United States, where the language and real estate customs vary within narrow ranges from state to state, movement within Asia involves widely different language, legal, cultural and consumer behavioral conditions."
Thus, acquisition or investment in an existing local chain may be preferable to starting from scratch, Rosen adds. "Wal-Mart, which struggled with its China start-up strategy, has switched to acquisitions as a means to more quickly enter and expand in new countries," he says. "Wal-Mart acquired Makro in South Korea and in the process had immediate locations and cash flow from which to support a full management team. Wal-Mart is now recasting Makro stores into Wal-Mart concepts and building new stores on sites previously acquired by Makro."
In addition, licensing and franchising is popular among fashion retailers that supply merchandise to the stores and aid in design, including Tommy Hilfiger, Lacoste, Hugo Boss, Esprit, Speedo, La Coq Sportif, Timberland and Nine West. "This method puts the bulk of the risk on the partner, but takes some control of the brand away from the parent," says Burkard. "Theme restaurants typically use franchising. Ruby Tuesday, TGI Friday's and Hooters are recent examples."
Unfamiliar leases Most retailers understand that doing business overseas is different.
Take leases, for example. In Latin America, Burkard says, shopping center leases for the most part are patterned after leases in the United States. Differences can include double rent in December; shorter lease terms; and more variable rental rates, with inflation escalators similar to a Consumer Price Index.
Generally, local Asian lease forms are much less explicit than U.S. leases, often because leasing is not the normal route taken by local developers, Rosen says.
"The concept of landlord responsibilities and tenant responsibilities in terms of build-out does not use the same terminology or practices as found in the United States," he explains.
"It is advisable to retain an attorney familiar with both the retailer's lease requirements and with local laws and real estate customs in order to end up with a final lease form that is mutually acceptable."
>From a retailer's point of view, some markets don't have the type of >retail space or environment American companies desire. Says Rosen, >"Existing retail/commercial buildings often have low ceiling heights, >inefficient column grids, little or no on-site parking, small floor >plates, etc. Some of the lack of market entry reflects lack of quality >product rather than lack of retailer interest."
Analysts say that American retailers appear eager to expand internationally but will remain cautious about opening stores. One reason is financial. "They want to stay alive at home," says Eichelbaum. "The reality is that Wall Street is challenging their operating discipline, and has not been friendly to overseas expansion."
Undaunted, U.S. retailers continue to pursue international opportunities, attracted by a seemingly boundless promise of potential.
So what are some of the risks of international expansion? "Let me count the ways," quips Jeffrey Rosen, development director for CB Richard Ellis' International Retail Development Services Group.
"Language and cultural differences are the most obvious barriers," he says. "Although English is the universal business language in some parts of the world, such as Asia, the majority of retail customers are not fluent in English - especially in American English and more so when it comes to colloquialisms we take for granted in marketing and advertising campaigns."
Some countries did have or continue to have restrictions on the entry of foreign retailers. "India is just now beginning to relax its rules, including the reduction of high tariffs imposed on imported goods," he says. "Korea has eliminated the prohibition on the ownership of land by foreigners and the restrictions of majority or wholly owned businesses by foreigners."
Japan has traditionally been a difficult market for foreign companies, compounded by the longtime domination of the retailing industry by huge department store chains such as Jusco, Mitsukoshi and Sogo. Another hurdle is the legal/cultural prohibitions against discounting or other retailing practices routinely employed in the United States. Legislation is slowly moving to amend a national law in Japan that prohibits the development of large-scale malls, thus increasing the prospect for development of U.S.-style retail-entertainment malls.
Foreign exchange risks and currency controls are also potential barriers. For example, China and India have currencies that are not officially convertible. That means the ability to actually repatriate profits may not be currently possible or possible only through surreptitious means.
In countries such as these, Rosen says, the strategy must reinvest profits into expansion until mechanisms come into effect that would allow an orderly, legal repatriation of assets.