It turns out retailers trying to enter foreign markets have to adhere to the same cardinal rule overseas as they do at home: Choosing the right sites for their stores is one of the main requirements for success. The other requirements include forming partnerships with local operators to gain access to on-the-ground resources and building flexibility into their contracts.
Given stagnant population growth and barely rising GDPs in many Western nations, retailers today increasingly look to emerging markets like China and Brazil for expansion potential, says Bryan Gildenberg, chief knowledge officer with Kantar Retail, a global retail consulting firm. Both countries have exploding populations (some secondary cities in China, for instance, have as many as 5 million residents) and a growing base of middle-class consumers.
But Western chains considering entering those markets have to keep in mind that moving a concept overseas is no easy feat, given that local consumers might have radically different tastes than shoppers at home and that good real estate is often hard to come by. In the past, retailers have been encouraged to adapt their operations to fit local needs. The truth is, however, the most successful overseas transplants don’t have to make too many tweaks to their basic operating models in order to appeal to foreign shoppers, according to Gildenberg.
“The most common mistake retailers make [involve] ambitions that don’t match up to the opportunity of what’s actually available,” he says, adding that most retailers shouldn’t expect to become dominant operators outside their home countries. “A lot of very successful retailers simply take what they do and translate it reasonably directly into other markets. A Costco outside the U.S. is fairly similar to the ones [here]. For the most part, they don’t need to radically change the format. That model, other things being equal, actually works better than trying to radically change what you do to meet the needs of the broader market.”
For example, when Wal-Mart Stores had to exit Germany in the mid-2000s, many analysts blamed the chain’s failure on its misapprehension of local employee protection laws and strong competition from German retailers. But Wal-Mart’s struggles in the country might have been due more to its choice of less than stellar real estate, in Gildenberg’s view.
Less than perfect
In fact, finding appropriate real estate is one of the biggest struggles retailers face when entering emerging markets, according to David Solomon, president of NAI ReStore, a Narberth, Pa.-based retail real estate services firm. NAI ReStore recently formed RPS Partners, a joint venture with Pacific Star Group, an Asian private equity real estate group, to provide retail chains with a strategic development arm in the region.
In China, the main issue is that most retail real estate owners don’t specialize in retail—they are often more focused on residential or office development, and use retail projects to fund their other activities, or as part of larger mixed-use centers, Solomon says. As a result, many Chinese landlords often make mistakes when building new malls and shopping centers—they pick the wrong development sites, or make the ceiling heights in the stores too low or put the loading docks in the wrong place. And even if everything is done right and in a timely manner, the developer might offer the best spaces to local retailers first or ask for exorbitantly high rents.
As a result, many U.S. retailers that have set ambitious growth plans for China, including McDonald’s and Wal-Mart, have had to slash their annual expansion plans because of delays associated with securing the right locations, Solomon notes.
That’s why it often makes sense to partner with local retail operators when entering a new country, according to Matt Winn, U.S. retail services leader with brokerage firm Cushman & Wakefield. The locals will have a better sense of which sites might work best and might also be able to get better deals from local landlords. This might be done through a joint venture or through a wholesale acquisition of a local retail chain, the way Wal-Mart has done in some countries, but “the fundamental rule of real estate that retailers should adhere to is taking advantage of local market knowledge,” says Lew Kornberg, managing director in the corporate retail solutions group of Jones Lang LaSalle.
“The number one, most important thing that a retailer can do is partner with the best in-country resource that they can find. There is no substitute for that.”
They should also make sure that the leases they sign offer a great deal of flexibility, both for expansion and early termination, because all the research in the world won’t provide a definitive answer as to whether overseas expansion will be a success until that first store or several stores are in operation, Kornberg adds.
Also, retailers should keep in mind that if operating bricks-and-mortar store in a new market proves challenging, they can use the power of the Internet to sell their products online, the way Gap Inc. did in 2010, when it began offering international shipping to over 90 countries from its e-commerce sites.
“Most of the [growth] markets that are left in the world are markets where direct ownership is complicated,” notes Gildenberg. “So I would say the best-in-class retailers going forward are going to get good at understanding how quickly those markets’ shoppers are going digital and how to leverage that most effectively. They are going to be very open-minded about what their physical format is going to look like and what their mobile scale is going to be.”
The questions that retailers face when entering in new markets will be the subject of the Global Retail Panorama panel at the ICSC Retail Real Estate World Summit.