As trading conditions in the UK remain tough, retailers are looking overseas for growth. We look at the potential and pitfalls of the various routes to international markets.

Philip Green with Nordstrom president of merchandising Pete Nordstrom

Distribution deals

A US Topshop store

A US Topshop store

Over the past few weeks a raft of British retailers have struck deals to distribute their product overseas through local retailers’ stores.

A fortnight ago, Arcadia tycoon Sir Philip Green unveiled a deal to open Topshop and Topman boutiques in 14 Nordstrom stores in the US. The tie-up dovetails with the recent opening of Topshop flagships in the US – it has three at present – but will give the retailer a much greater geographical spread, from Hawaii in the Pacific to the East Coast. If the enterprise is a success, the UK retailer’s range can be rolled out to many more Nordstrom stores, Green told Retail Week last week.

Green, who has adopted a variety of approaches internationally, is also trying  a similar approach in Germany, where his Wallis and Evans brands are to be sold through Karstadt. Several other UK retailers are also taking the same route to introduce their brands to German shoppers. Ted Baker, New Look, Next’s Lipsy, Phase Eight, Reiss and Republic have all struck deals with Karstadt too (Retail Week,July 20).

An in-store presence in other retailers’ shops overseas may be through concessions or wholesale. French Connection has a well-established wholesale business, which helped compensate for tough UK retail conditions last year.

Waitrose, the John Lewis-owned grocer, sells its products internationally from the Falkland Islands to the Far East. Hong Kong grocer ParknShop, for instance, carries 500 Waitrose wines and is introducing 1,100 Waitrose lines, while the retailer’s Duchy Originals range is being sold in the US.

In an interview with the John Lewis Partnership online magazine earlier this year, Waitrose business-to-business director David Morton said: “The Duchy range is a very British link to the Prince of Wales and the good work he stands for, and is proving a useful way of introducing some of the large European retailers to Waitrose.

“A large element of the team’s work is supplying retailers in other countries on an exclusive basis. They are looking for a real point of difference from the retailers around them and that’s something we can supply.”

Those comments might apply to many of the retailers expanding internationally by selling through others’ stores. In Nordstrom, for instance, the Topshop and Topman ranges will provide a point of difference that should benefit both parties.

Pros A relatively low-cost, low-risk way of building international exposure. The points of difference introduced can benefit all the retailers involved.

Cons Dependent upon having the right partner and the UK retailer being assured that its product will be shown to best effect and have appropriate in-store prominence.

Online expansion

Next is eyeing up China

Next is eyeing up China

The web is a popular way to test uncharted territories. Launching online overseas is relatively low cost and can indicate if there is an appetite for stores. Fashion retailer Bonmarché launched its online site globally last October to scout for potential store locations.

Some retailers maximise returns by launching foreign-language sites. Debenhams earlier this month launched a German-language website, its first in a foreign language, as part of chief executive Michael Sharp’s vision for it to become a “leading international, multichannel retailer”. It also plans to expand its online reach by extending its international delivery service from seven to 67 countries this summer.

Online fashion giant Asos generates 59% of its sales internationally and is committed to opening foreign-language sites as well as the English-language sites it already operates in Australia and the US. It has launched eight foreign-language sites in countries including France and Germany and has spent the past year developing a single platform to enable it to launch more sites, including for China.

Maternity retailer Mothercare has also upgraded its web platform to allow it to be flexible with currency and language ahead of an international roll-out online.

Asos is not the only pure-play that has cast its net internationally. Shop Direct-owned Very debuted in the US last year, following rival N Brown brand Simply Be’s move across the Atlantic.

Next is expanding its Directory business as part of a plan to quadruple global sales by 2013. It is also to launch a Chinese website to complement its smattering of stores there.

Marks & Spencer is also adopting a ‘bricks and clicks’ strategy to enter foreign markets. M&S returned to France last year, a decade after it retreated from the country. The retailer has launched a French website that trades in euros, which will form a foundation of its offer in the country. It is looking for a limited number of store locations.

Pros A low-cost way to trade overseas and to test the appetite for stores if appropriate.

Cons Online may offer less brand awareness than a high street presence. The online model may also need to be adjusted to take into account different payment preferences and delivery expectations in each country.

Mergers and acquisitions

Retailers across all sectors have done deals in recent years, from grocery and DIY to department stores and health and beauty.

Although its success is not yet proven, Alliance Boots’ merger with US giant Walgreens is the most recent example of a UK retailer tying up with another big name to expand internationally.  The deal gives Boots a presence in the US market, where it can sell lines such as No7 and create foundations for expansion into more countries.

JD Sports has also been on the acquisition trail – recent purchases have included French retailer Chausport. The 2009 deal gave the UK retailer a new source of revenue in a big market and enabled it to develop its own brand in the country and open stores. It also took a stake in Spanish sports and clothing retailer Sprinter, and acquired Irish chain Champion Sports.

Kingfisher and JD Sports have bought French retailers

Kingfisher and JD Sports have bought French retailers

In 2009, Debenhams purchased Danish department store group Magasin. The buy gave the department store a presence in Denmark, and the Magasin stores have done well, delivering “good growth” in like-for-likes in the 16 weeks to June 23.

Kingfisher’s takeover of French retailer Castorama kick-started its evolution into a global player in the home-improvement market. As well as France, today the retailer has stores in Poland and Russia under the Castorama banner.

The acquisition made Kingfisher the world’s third-largest DIY retailer behind the US’s Home Depot and Lowe’s. It also has joint ventures in Germany and Turkey and B&Q stores in China.

In 2008, Tesco strengthened its position in its second biggest market, South Korea, with the £958m acquisition of Homever. It rebranded the estate to Tesco Home Plus and opened more stores under that fascia. The market has become a testing ground for the retailer, which tried out its virtual shopping walls in train stations and bus stops.

Pros Retailers have full control following an acquisition and a strong say in how the business is run through a merger. Such deals also give retailers immediate scale and ownership of a recognised brand in an overseas market.

Cons It is a high-cost, high-risk way of expanding. Red tape can be a big headache when purchasing foreign companies.

Build from the ground

A risky but potentially lucrative way to enter new markets is by building an own-store estate. This model requires retailers to invest large sums to research the market and get the business off the ground, and to create the infrastructure to support it.

Tesco launched its Fresh and Easy brand in the US in 2007

Tesco launched its Fresh and Easy brand in the US in 2007

Perhaps the most notable example of this model is Tesco, which launched its Fresh & Easy fascia in the US in late 2007 when there was an investment commitment of $2bn (£1.3bn). It decided to create a new brand in the US rather than entering under its eponymous fascia. The chain has come under criticism from the City because of its break-even date having been pushed back. Tesco claims that performance has been hit by lack of consumer take-up of new housing near where it opened stores, as the housing market took a hit amid tough economic conditions.

Value clothing group Primark has also decided to build from the ground in continental Europe. In the last quarter, all four of the new stores Primark opened were in Spain and since then it has opened its first shop in Berlin. Last year, the retailer told analysts that it sees potential for 150 shops in Germany where there are eight at present.

Pros Control over brand and all profits generated.

Cons Can be expensive and involves complexities such as local planning laws, the amount of time taken to build scale, the supply chain and employment regulations.

Franchising and joint ventures

Franchising is one of the most common ways to enter a new market and a relatively low-cost option to test consumer demand in unfamiliar territories. 

Fashion retailers are among the most prevalent users of the franchise model internationally. Topshop, Ted Baker and Karen Millen all have franchised stores abroad while Mothercare relies on franchised international operations for the bulk of its growth.

The approach is particularly common in the Middle East, where ownership structures could otherwise be a barrier to entry. Earlier this year, for instance, Asda signed a deal with Lebanon-based Azadea Group to open George franchise stores in the Middle East.

In Europe, too, the model is attractive. Iceland Foods has embarked on international expansion. It has opened stores in the Czech Republic and Portugal, struck a deal in Iceland and is looking at Poland and Hungary.

A lack of control is one of the biggest deterrents from using a franchise model. Finding a local partner that has the same vision for expansion and is in tune with brand values can prove tricky, especially for retailers for whom use quality of service as a point of difference.

Questions have also been raised over how well a franchise model works alongside online services coordinated from head office such as click-and-collect.

Tristan Rogers, chief executive of ConcretePlatform, which works with retailers including Marks & Spencer, Clarks, George and Tesco to expand their operations internationally, says: “Franchising is proving an increasingly popular commercial model.

“However, even though this is a viable strategy, retailers will still need to protect the essence of what they have created – their brand promise – and this must be consistent in everything they do, including everything the customer sees and touches and their entire go-to-market strategy.”

Joint ventures are also an option. In India, where Tesco is not allowed to trade under its own name because of laws governing multi-brand retailers, the grocer struck a partnership with Tata Group-owned Trent to run the Star Bazaar fascia.

Tesco has a stake in Star Bazaar in India

Tesco has a stake in Star Bazaar in India

Pros Low cost, access to local knowledge, easy to set up.

Cons Lack of control, difficulty combining with online offer, need to split profits.