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BRC International Retailing Conference 2012

Although international expansion provides one of the great opportunities for UK retailers it is not something that should be undertaken without thorough research and preparation. Overseas adventurers should not expect to enjoy overnight success.By Glynn Davis

GENERAL MERCHANDISE

BRC International Retailing Conference 2012

Although international expansion provides one of the great opportunities for UK retailers it is not something that should be undertaken without thorough research and preparation. Overseas adventurers should not expect to enjoy overnight success.By Glynn Davis

Speaking at the recent BRC International Retailing Conference 2012 in London Kevin Rusling, director of international for Wal-Mart-owned George at Asda, warned: “I’ve had disturbing conversations with people who’d decided to go international because they were approached by a third-party.” 

He suggested it should not be prompted by consultants or potential partners but by the rule of GOYA (getting off your arse) and undertaking research and choosing the right third-party to work with in each country.

But initially he says no company should even consider overseas expansion unless they have a “healthy” UK business. This was a lesson learnt the hard way by Boots that first opened international stores in the 1990s but had to close them two years later.

Gordon Farquhar, managing director of Boots International, says: “The home company needs to be in good shape, but it wasn’t, and the CEO was under pressure so we had the City questioning the international strategy.”

Other elements that Boots got wrong, according to Farquhar, were its selection of partners and its simple replication of the model that it operated in the UK. It has since returned overseas and now operates 500 stores that generate £1 billion of annual sales, which has been achieved on the back of research: “There is no easy way. There is nothing better than knowing your customers and your competitors.”

The other vital component is not to expect instant success. “We’ve thought about closing in every single country we’re now in. There are never any overnight successes in international. The cash burn can be significant - we had £45 million per year on 15-20 stores,” reveals Farquhar.

There are also cautionary tales to be had from Joseph Wan, chief executive of Harvey Nichols, who told delegates about closing a store in Jakarta, Indonesia, which was – again – partly down to choosing a poor partner in the country.

Three potential partners had all claimed statistics for high levels of affluent individuals in the country, which was contrary to the investigations by Harvey Nichols. “We thought we might have been thinking too negatively. But as soon as the store opened it was trading lower than expected so it had to close. I’d say, compare your due diligence with the facts from your prospective partners,” he suggests.

In the case of Harvey Nichols its partners are franchisees – although Wan says it is like licensing as it is a more flexible arrangement than a typical franchise agreement – and its latest deal involves a new store in Kuwait.

The USP of Harvey Nichols is its brand-of-brands positioning at the luxury end of the market and Wan says you have to “exploit” your unique element when going into overseas markets, but also adapt the offer.

So in Kuwait there will be a bigger children’s wear offer and more ornaments and jewellery – adorned with plenty of gold. And also, the highest-quality English cream tea.

He says the target is BRIC countries and the following 11 that includes the likes of Vietnam with the crucial component of dense populations and rising middle income groups. “We now post-Lehman need to focus on growth markets and the western world will have a lot of pain before there is any sustainable economic growth,” he says.

The opportunity for big growth overseas is the key driver for all UK businesses to consider international, but even with this backdrop Francis McAuley, international director at Debenhams, says the international division can still be seen as an “irritation” until its store bases attains some scale.

“Only in the last 18 months have we become an opportunity. If you’ve only got two or three stores then you’ve got to cajole people along. But it gets to a tipping point where things start to change,” he says.

Debenhams now has 67 stores around the word and has plans to add another 130 by 2015 that will give it some real power overseas. And like Harvey Nichols the focus is on emerging markets, although McAuley says they are “maturing at a breathtaking rate”. Targets are the likes of Nigeria, Columbia and Iran (where it has four stores).

The success of its franchise arrangements, he suggests, is down to: “Communication with franchisees, because if the trust goes then we are all screwed. You therefore need to simplify all lines of communication.”

He also points to getting sign-off on new sites: “The only failures we’ve had were when partners overpaid on properties. We now sign-off on all deals and try to get the same deals as we do in the UK.”

Although the likes of Debenhams is one of a number of UK retailers that have built a track record of international success he points to Spain as being the only country to have businesses that were set up as international companies – most notably Inditex and its Zara brand.

Simon Marshall, chief executive of Saudi Arabia-based Fawaz Al Hokair & Co, has great experience as an overseas partner for many retailers, working with 72 brands across 15 countries including Zara: “Their stores print money and are very rigid, with all stores treated exactly the same. They say [to franchisees] where to even put the stapler – six inches from the till and at a certain angle.”

The UK operators in contrast have had to adapt their operations and tool-up in order to develop their overseas presences, with Rusling stating that he regards attracting top talent as his number one recommendation.

“Wal-Mart is 16 different businesses and the retail of products is very local so we needed to externally recruit the leader of our international business. We went from four to 30 people – investing ahead of the curve- before we’d even sold any products,” he explains.

He recommends that if the senior executives come from within the core UK business then he warns that they should not then be returned their once the overseas operation is up and running as this can affect the confidence of the overseas partner.

Marshall cites Tesco as an impressive international operator in the way it structures its operations: “They set up separate teams away from the core business, with the objective of getting the job done. In Prague we’ll have 20 Tesco stores and also [units] in Kazakhstan and Georgia.”

One new area of focus for Marshall is e-commerce, which has been a growing issue in his position as franchisee to major brands. Not only could they be shipping their products directly from the UK into international markets that would compete with his franchised stores. But controversially they could have a localised site in these territories. “In the past I’d ask them for the e-commerce rights and they’d say ‘no’. So we are going to make a website for our brands and we hope to [later] build a virtual mall of brands.”

McAuley recognises this issue: “We have an e-commerce solution – that is treated as another store – which the franchise partner should have the rights to. Then when they sell they should pay a royalty on that to us. It would be immoral [as a retailer] to set up your own site.”

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