As retailers chase the opportunity of international expansion we analyse how they are overcoming the threats such a strategy poses.
There are as many good reasons for a retailer to expand internationally as there are complexities that inhibit action. It’s all too easy for retailers to follow their competitors or market sentiment that says international expansion should be top of their list even when it may not be the best strategy for their individual business.
So what are the positives? For many retailers international expansion is about greater options for growth and a wider regional spread. “Spreading risk is one of the biggest opportunities we see from international expansion,” says Shaun Loughlin, managing director of moto and action sports retailer FreestyleXtreme. “Until we launched into North America and Australia we were very reliant on the Eurozone, particularly France, where the economy and the currency value has been pretty volatile over the last seven years or so. By having an established presence in more than one continent we don’t have to be overly reliant on any one region,” he says.
At Boden IT and operations director Ben Dreyer agrees that international strategy prevents an over reliance upon a territory. “It’s good for a business to be in different markets because markets ebb and flow and so it’s better not to have all your eggs in one market,” he says.
Depending on the route chosen cost of market entry can vary widely but in general increased economies of scale make it an attractive vision for many and is another reason why retailers press the go button on international expansion. At Karen Millen for example the company sees its expansion into Canada as a natural progression since there are greater economies of scale to be gained from having an enlarged North American management platform.
And, most importantly the huge growth in international expansion by retailers has meant that increasingly third party suppliers are upping their game to make international expansion easier too – providing even more of a stimulus and reason to expand. “As more and more of us pursue this opportunity for international expansion there are barriers coming down rather than coming up,” says Dreyer.
It’s a statement Colin Saunders, international ecommerce specialist and previously part of the international teams for both House of Fraser and Tesco, fully supports. “The market is very competitive but the amount of resource required to go international is actually coming down all the time,” says Saunders.
And, whilst there are many challenges to be overcome they can be tackled so long as everyone is on the same journey. “Because of the amount of stakeholders that need to be involved companies that are passionate about going international need to have real engagement across every facet of the business. It’s not just an international manager’s job – everyone from finance to legal needs to be aware that there is an international journey and the challenges involved in that,” he says.
Mirador Digital managing director Andrew McClelland perhaps sums it up best. “There is the peer group pressure of competitors – don’t rush in, understand what your proposition would look like and don’t assume they are making money,” he says.
Although international expansion may be getting easier three key challenges remain common in every report we do on international – that of 1) managing the logistics of international operations in terms of delivery and returns, 2) deciding how localised to go and 3) ensuring a consistent brand experience in markets that may be thousands of miles away.
Delivery and returns
It’s this that remains one of the biggest challenges for retailers as they have to not only balance delivery and returns costs but decide on the practicalities of logistics too – i.e. will they hold stock and returns in the country concerned or service everything from their domestic market.
“Without a doubt, delivery and returns cost is the biggest issue facing any company trying to expand internationally, especially if you are trying to expand into an already mature market with stiff competition,” says Loughlin. The company has worked hard to get good rates and has since expanded such buying power to share with other businesses in the south west to launch Parcel Rate Experts – aimed at helping other local companies drive down delivery and returns rates by collaborating together to reduce costs.
For shoe retailer Office, which is still in the early days of its international expansion one of the main current challenges is the relative cost of dispatch according to Office multichannel director Robin Worthington. “All our warehousing and fulfilment is currently out of the UK, so the cost of delivery can be prohibitive in some cases. We are looking at alternative, lower cost delivery options but that can be at the cost of speed. To compete with local retailers, our delivery still needs to be quick, so we may at some have to look at more localised distribution,” says Worthington.
“The extra cost of delivery is a concern, as it comes straight off the bottom line. In simple terms, the more you spend on dispatch, the less you have to invest in marketing and site improvements,” he says. “Of course you could charge the customer, but you have to be competitive, and many markets now expect free delivery and free returns,” says Worthington. “This adds to the cost base. Where we have stores, free returns isn’t a problem as customers can return orders to there. But if you have to pay for both the outbound and the inbound postage, that’s a lot of money off your profit, “he says.
Decisions have to be made on how and where to fulfil from. At Boden the company recently launched into Australia. Although it fulfils from the UK but has set up a more local returns hub where returned goods are consolidated rather than being sent straight back to the company’s Leicester depot.
Returns are a particular headache says Dreyer, particularly in markets where the market isn’t that big. “One challenge in particular is about how you get a good returns process in place when you only have a relatively small customer base in one market – how do you provide a good returns and delivery service,” he says.
McClelland, says that a local returns address can do wonders for a business. “Providing a returns address in that country gives additional confidence that the brand actually exists,” he says.
For its launch into the German market, the first step of its international expansion programme, one of electrical goods retailer Ao.com’s primary objectives was in establishing the same logistics set-up as in the UK so that it could be in complete control of its delivery and returns strategy. It was a costly and somewhat unusual strategy but one the company claims it will pay dividends in the long run. “As we own and control our end-to-end operations in both the UK and Germany, which includes our own logistics arm, delivery and returns aren’t necessarily an issue for us,” says Kevin Monk, group strategy director and managing director of ao.de.
“So far the response to our delivery offer has been great, with many customers impressed by the fact we own our fleet and that their product gets delivered in an ao.de van. The fact that we also take the product into the customer’s home to the point of connection has also been a winning formula in a market that charges customers for every door that a product passes through,” he says.
Indeed he says the only real issue the company has faced in terms of logistics was realising that its UK double-decker trailers didn’t fit under German bridges. “In keeping with German efficiency, we decided not to change the size of the trailer as that would mean increasing the number of deliveries which would have impact on costs and emissions. Instead we decided to design and manufacture a new type of double-decker trailer that the driver can reduce the height of at the touch of a button,” he says.
Replicating brand experience
In truth the challenges of replicating the brand experience and of localisation go together since the two are so closely entwined but for the purposes of this report we have separated them.
At Karen Millen international business development director Simon Gaffey says part of the company’s success in expanding internationally (61% of its business is now international) comes from the company’s determination to deliver brand consistency across the globe, something the retailer does by working closely with its partners. “Our philosophy has always been that we in Shoreditch are brand experts but we look to our local operating partners as the market experts and the blend of knowledge, skill, experience and know-how comes together to optimise the business,” he says.
This dedication ensure a consistent brand experience worldwide, according to Gaffey. “The experience you have when you engage with the brand is the same in whichever country and through whichever channel you are touching the brand. This extends to the store design, the music we play, the visual merchandising, the scent in the stores and critically the collection itself. We do however ensure the subtle nuances of regional fashion taste and preference are accommodated through intelligent range editing as well as climatic capsule introductions which ensure the brand can feel the same in Iceland and Mexico but without inappropriate merchandise assortments,” he says.
Many retailers manage a consistent brand experience since everything is handled centrally. “As we manage logistics and customer service from one central location, all customer facing operations are standardised across the business. This ensures a consistent experience,” says Big Red Group CEO Richard O’Connor.
At Office multichannel director Robin Worthington says that although the company employs local people to run its stores, all of the company’s marketing, visual merchandising, stock management, ecommerce and customer service is managed from the UK so that everything follows the same UK lead. However it is then localised to the market. “We also employ people from the countries we are present in to help us localise this experience; either based in our London head office, or ‘on the ground’ in our stores, for example in Germany,” he says.
Others have to go one step further. At high end bike brand Islabikes the company’s managing director Mark McCance says the brand has to do all it can to offer the same experience wherever it is and that internationally this provides even more of a challenge since the customer experience is all important to such a high end brand. “Islabikes is a premium brand with a very high quality product. Given that the product requires assembly and service, this creates additional challenges for internationalising the brand in contrast to a pure play retailer where in reality the service relationship often stops at the point of fulfilment,” says McCance. “Much of the work we focus on is ensuring the consistency of quality in the product and consistency of high touch customer service at a local level and optimising the correct division of activity between support from the centre across all territories and sales/brand building locally,” he says.
Customer service is obviously key here but AO.com’s Monk says that understanding how needs differ in new markets is vital. “We have had to acknowledge that British and German service culture is very different. Therefore we have worked hard to ensure that our values have both transferred and translated to the German market,” he says.
But essentially he says the company’s brand ethos travels across borders. “For example, we have a saying at AO which is “treat every customer as you would want your gran to be treated” – this mantra, which essentially asks our staff to treat our customers with respect, is easily understood across any territory. Ultimately, we believe that good customer service will always win and with the right training and infrastructure is fully transferable across markets. We are confident that this approach will revolutionise the market in which ever territory we expand into and as a result we can keep the brand experience constant, even if the execution of this differs slightly across territories,” he says.
However for some markets the balance and bias towards replicating the same brand or customer experience as the domestic market is a decision that retailers must make dependent on the worthwhile return on investment that is required. “When it’s a small worth market you are just investing a small amount but you crank it up [depending on the size of the market],” says Boden’s Dreyer. “So for Germany we have a whole infrastructure and we will tailor the market for the German experience because they don’t want an exact replica of what we do in the UK. It’s about steadily adding in more and more as the market grows,” he says.
Brand consistency is undoubtedly important but as we have already learned in this report there are always surprises and brands should also be open to different ways that their brand is, or could be interpreted Koch, formerly of both M&S and Maplin tells how adjustments were made to the brand message at M&S to suit, allowing it a slightly different market overseas by playing up different credential to that of the UK. “At M&S we moved away from the “Only at Your M&S” brand to focus on M&S London. That allowed us to bring a different brand experience internationally – one that was London based and a heritage brand. It was about upping the brand and making it more premium than in the local market and that worked well especially for markets like France where Autograph was very strong.” Similarly the school uniform reference earlier suggests that sometimes sticking rigidly to a brand definition isn’t necessarily the best decision.
The decision of how localised a brand should go when expanding abroad has always been a challenge and our research this year shows it’s not getting any easier.
Retailers have to decide on the balance of localisation needed. At Big Red Group O’Connor says that using marketplaces to soft launch and test a country initially starts with a level of localisation such as relevant banners and callouts on marketplaces, as well as potential translation of key lines before rolling out with a full localised launch with dedicated website and full translation if sufficient traction is gained.
“In terms of translations, our approach is to work with brands and suppliers to share the risk of entering a new market, which obviously benefits both parties, and the cost of human translation would be part of this,” says O’Connor.
The issue of language is a challenge. A first step can be machine translation services but many retailers say these can do more harm than good if not supplemented with other measures. “We believe using machine translation, while cost effective, can seriously affect overall customer experience,” says O’Connor, whose company employs a multi-lingual customer service team.
The same has proved true at Office. “For our German website, at the start of the process, we decided to use a translation agency rather than go down one of the more automated translation routes,” says Robin Worthington, multichannel director at Office. “It’s very important for Office as a business to talk to its customers in a way they identify with, so a machine translation approach wouldn’t work. Now we are live, we have German speakers in our head office, who are responsible for daily site updates, plus the marketing and promotional calendar. They produce a fair amount of the content, but still work with the agency to produce bulk translations, and have been working on brand and tone of voice guidelines to ensure we get the language right,” he says.
Koch says retailers have to do more than just translate when it comes to international expansion. “If you have any marketing activities you need to transcreate rather than just translate since for instance a given catchphrase won’t come across in the same way,” he says.
For some retailers, such as fashion, the simple challenge of different garment names in different countries – such as trainers in the UK but sneakers in the US – can be challenge enough but other retailers face greater translation challenges. At FreestyleXtreme Loughlin says the very nature of the industry he serves can produce its own problems around localisation. “In a niche market like action sports the tone, the obscurity of the words and the slang used present huge challenges to the translation team,” he says.
“You need local people to have a sense check so that there is no misunderstanding or anything that could come across as an insult or irritate a customer rather than attract them,” agrees Koch. So whilst localisation of language and payment methods is important retailers also have to determine how much to localise content too.
Mirador Digital’s McClelland, says retailers shouldn’t overlook the value of their existing content for building the brand in new markets even without having to localise too much. “If you have a lot of rich content you can tell a very good story and generate that awareness fairly quickly and generate a core asset comms base that you can use to talk to both groups with very little fine-tuning in between them ,” he says.
At Big Red Group the company currently only has an Australian site so can largely reuse its existing content but CEO Richard O’Connor says it will introduce location specific content for different regions as its international rollout continues as well as merchandising according to the country it is entering as it continues with its localised rollout plan.
Similarly at Office although it has some location specific content for different regions Worthington says that economies of scale dictate that generally the company tries to syndicate as much of the same content as possible across markets. “Luckily for us, the products and brands we sell are fairly universal, however, we will of course take into account local differences in trading, for example recognising local holidays, calendar events and product selection,” says Worthington.
At JD Williams the company’s head of international Jackie Hill says some shared content happens but across social media in particular content is tailored to individual markets. “Both websites are country specific, whilst using shared assets wherever appropriate for efficiency purposes. We do produce specific content for the different territories, particularly for social media purposes,” she says.
Others choose to use the same social media content – or at least share their domestic version, something that Animal’s international sales director David Abramson does. “We offer all our social media content out to our international partners so they can put it on their own websites. We also have our own riders that we sponsored and we encourage partners to do the same thing,” he says.
And others, like Ao, localise content completely with Monk explaining that the business has a team that writes all of its on-line content in order to ensure that it is suitable for the German market.
Of course localisation extends to product and merchandising too. “One of our challenges is the SMU special make up market,” says Animal’s Abramson. “For example in the Middle East maxi dresses need to be longer to cover the ankle. In Asia customers like to have pocket on t-shirts or shirts and then in markets like China you have to do smaller sizes – all of these are a risk because if it doesn’t work you have nowhere to put the product,” he says.
And issues can be as basic as size and colour preferences. “In France we were always missing size 6 and 8,” says Koch. “You need to factor in differences in sizes. It’s the same with colours, for example black for Parisian customers is the norm and they won’t buy into fancy colourful looks. It’s about adapting to styles and expectations,” he says.
Retailers not only need to look at product specifically but how they merchandise on site too. At FreestyleXtreme the retailer has automated merchandising tools which adjust the order of products and brands based on the sales for each storefront individually, but the company doesn’t have separate creative/banners.
At Office merchandising differences depends on the sales and demands of that local market, including not just product choice, but seasonality, price and promotions, according to Worthington.
Again it’s a balance of ROI. “For Germany yes of course we do local merchandising do but for smaller countries we don’t,” says Boden’s Dreyer. “You have to get the balance right – you get to certain size and you say this is worth merchandising specifically for this country,” he says. The only exception is Australia he points out, where the reverse season of the market means a necessity obviously for local merchandising despite the relative smallness of the market.
A particular worry in the last twelve months
The volatility of currency rates seems to be having a bigger effect than ever in the last twelve months. It was only this time last year for example that ASOS was forced to issue a profits warning after the impact of currency fluctuations on its business and even in March, when the company announced more positive increased sales thanks to the roll out of zonal pricing, analysts warned that the continuing strength of the British pound against the Euro would continue to impact profits for the next two quarters.
Similarly in May of this year in its 2014/15 year-end financial results Marks and Spencer revealed that its international business was being hit both by a weaker and a challenging macro-economic backdrop with the business being affected in the short-term by the impact. It reported that sales in its international business were down 2.1% on a constant currency basis and down 5.7% on reported currency.
H&M is another retailer worrying about currency fluctuations. The retailer warned in March that the strong dollar would likely drive up sourcing costs this year. The retailer has a rather complicated setup where although most of its purchases are in dollars a large chunk of its sales are in Euros and it reports its results in Swedish krone – a set-up that is already understood to be worrying analysts who fear it will impact margins.
Of course political instability does nothing for currency strength either and at its results Marks and Spencer also highlighted the impact of political turbulence in a number of its franchise territories – particularly affecting performance in Russia, Ukraine and Turkey and resulting in lower shipments as a result.
Such volatility shows the added benefit of widespread rather than narrow expansion for retailers looking to minimise impact by maximising exposure. “Things like currency fluctuations can hit you extremely hard if you’re too reliant on a single market to supplement your revenue,” says Shaun Loughlin, managing director of moto and actions sports retailer FreestyleXtreme. “You can be extremely competitive on price in any given market one minute, then in the space of a month the currency can (and does) fluctuate by 10% and you’re either haemorrhaging money or you’re uncompetitive,” he says. “It’s a huge challenge, especially when you’re trying to compete on shipping costs/service as well as already working to tight margins on the product.”
At Karen Millen however international business development director Simon Gaffey says it is not currency fluctuations but price differentiation that is proving the biggest problem currently. “With greater awareness, visibility and globalisation I think the issue of regional price differentiation will present the greatest challenge going forwards not least when coupled with the massive advances in technology and confidence in remote shopping,” he says.
To address this he says retailers must ensure sufficient flexibility in the model and business structure to allow for margin variance and balance at country level.