US retailers are increasingly crossing the pond to set up shop in this country. Alex Lawson examines the opportunities and pitfalls they face.
The opening of lingerie giant Victoria’s Secret’s flagship London store on New Bond Street last week marked the latest arrival among an increasing number of US retailers entering the UK.
In the last five years trendy fashion retailers Abercrombie & Fitch, sister fascias Hollister and Gilly Hicks, Forever 21 and Opening Ceremony have joined retailers such as Anthropologie and the longer-established Apple in the expectation of forging a special relationship with UK shoppers. Others, such as American Eagle and J Crew, are understood to be keen to follow in their footsteps.
Making a name in the UK’s mature and highly competitive retail landscape – with London the jewel in its crown – has become both a statement of a retailer’s prowess and evidence that the UK is seen as a lucrative market despite generally tough trading conditions. And with ‘brand Britain’ on the rise as a result of the Diamond Jubilee and the Olympic Games, the UK is likely to remain front of mind for many international retailers.
Victoria’s Secret’s West End opening, which followed the retailer’s UK debut at Westfield Stratford City in July, was highly anticipated because of huge brand awareness among consumers in this country.
Verdict senior retail analyst Honor Westnedge says: “Its innovative products, marketing and fashionability look set to seduce British consumers.
“We expect its focus to be on large destination stores in key cities and shopping hot spots. This will keep the brand exclusive and niche, which shoppers will find exciting. Regular newness of fashion and seasonal designs will drive footfall and encourage shoppers to buy into the brand.”
A new frontier
Difficult US retailing conditions three to five years ago and the continuing maturity of domestic store estates on the other side of the pond combined to trigger overseas ambitions among American groups.
“Their economy was subdued and many retailers had simply run out of road,” says CBRE head of cross border retail for Europe, Middle East and Africa Peter Gold. “At that point if you wanted to drive revenue and profitability you had to look abroad and the UK is an attractive market.”
The lack of a language barrier in this country has also appealed and, once the relatively small Canadian market which tends to be the first port of call for US international expansion is addressed, the UK is a natural choice.
Consultancy MHE Europe chief executive George Wallace says: “US retailers have very sensibly developed a mature store and online business in their domestic market until they have become saturated.
“It’s very tempting to rush into new markets and territories, but the likes of Abercrombie & Fitch, Forever 21 and Victoria’s Secret have developed their brands and products so they’re familiar to overseas markets and then entered with a store business.”
US retailers entering the UK have often found themselves pushing at an open door as anticipation has mounted ahead of their arrival. The extent of US influence on popular culture in the UK has also had a part to play in building excitement.
Eye-catching openings such as Abercrombie & Fitch featuring models working in store and half-naked men created a buzz.
Global technology giant Apple similarly launched to much anticipation as it entered UK retail with a high-profile flagship on Regent Street in 2004. Apple, and close neighbour Anthropologie, have carved reputations as enjoyable places in which to shop as a result of large, well merchandised stores, helping US retailers to make a lasting first impression.
James Ebel, director of property agent Harper Dennis Hobbs, believes the influx of US retailers into the UK is a cyclical process. “Around 15 years ago I worked with Gap on its expansion into the UK,” he recalls. “At that time they were quickly followed by Crabtree & Evelyn, Talbots and Gymboree – there was a real run. It’s a cycle and now I see history repeating itself.”
The differences between the US and UK retail scenes can be a challenge for some new arrivals – retail property in particular perhaps presents the trickiest issue. Relatively cheap land in the US contrasts with high rents, balanced by high sales densities, in the UK.
“Siting and store space are key,” says Wallace. “There are lower occupancy and lower sales per sq ft in the US.”
Gold adds: “Size of property is definitely a challenge. Americans are used to trading from much larger units and not on multiple floors. Occupancy costs in the UK make an entrance much more of a leap of faith.”
Fashion retailer Forever 21 is perhaps the most prominent evidence of space as an issue. The retailer arrived in the UK with a store in Birmingham’s Bullring. However, it emerged that the store was bigger than the retailer needed and earlier this year it revealed it is to rent out some of the store to another retailer.
Wallace explains: “The Bullring store was a little big and the Oxford Circus shop a bit small, but Forever 21 is now back on the expansion trail.”
Forever 21 also exposed a key difference in the two retail markets either side of the pond with its school students’ offer. The retailer had expected a boom as the school year kicked off and youngsters returned to their studies. But while that might be the case in the States, where at the start of the new term students like to show off their latest purchases, it did not work in the UK, where uniforms rather than casual clothes are typically worn.
But, having made adjustments to its UK store portfolio, Forever 21 is said by some observers to be making headway here, having gained a reputation for the frequent introduction of new lines and popular sub-brands Forever 21+, For Love21 and 21Men.
A change in tack
Despite the UK’s attractiveness, US retailers’ international expansion strategies are changing.
“It used to be that US retailers would enter the UK in London and build up by going to Birmingham, Manchester and Edinburgh before moving on to Paris and building out – the hub and spoke strategy,” says Ebel.
“It is now much less of a country- by-country approach as property advisers have become more internationally minded. Now, we are as likely to compare Manchester with Milan, or Birmingham with Brussels, instead of Birmingham with Bolton when we are deciding where to take the brand next.”
Gold adds: “There is a lot of attention on Germany at the moment. The strength and size of the economy is attractive, as is France. Southern Europe is less popular, reflecting difficulties in the economies.”
A number of US names continue to be linked to likely openings in the UK. Harper Dennis Hobbs is on the hunt for a first UK store for US casualwear giant J Crew, the retailer loved by first lady Michelle Obama, which will be a highly anticipated opening for a brand with strong global resonance.
The homewares market could also experience an increase in overseas competition this year, fuelled by the potential entry of upmarket US home furnishing and cookware group Williams-Sonoma, owner of Pottery Barn.
However, with competition from emerging markets and the potential options inside and outside Europe, US retailers are likely to invest in the UK with caution.
Kurt Geiger chief executive Neil Clifford said this week that business rates and rents in the UK are spiralling, sending a warning to US boards that this country is not easy.
“How the hell can a council justify [£160,000 in business rates for a store]?” said Clifford. “For a comparable store in the US and Germany, we would pay local taxes of just £10,000. When we sit down and explain this to our American owners, they say, ‘What are you getting for this £160,000?’ and we have no idea.”
Nevertheless, it seems as if American retailers, for the time being at least, continue to be attracted to the UK. Although many will proceed with caution, the appeal of a presence here looks likely to result in more US retailers touching down.
Rocky shores - US retailers that hit trouble in the UK
Entering the UK is not easy and US electricals giant Best Buy had its fingers burnt when it was forced to withdraw from the market.
The US retailer abandoned its 10 UK stores, which were taken by Morrisons-owned Kiddicare, less than two years after starting to open its big boxes.
A difficult electricals market, the ferocity of competition from UK rival Dixons and problems elsewhere in the Best Buy empire prompted the retreat.
“Best Buy was an example of a US retailer who wanted it their own way. We do not have a retail park market that is as developed as it is in the US where the market is dominated by strip malls,” says James Ebel, director of property agent Harper Dennis Hobbs.
CBRE head of cross border retail for Europe, Middle East and Africa Peter Gold observes: “The challenge was more at home than in the UK. When challenges hit the domestic market the company took a view to quickly pull out and focus on its domestic business.”
US giant Dick’s Sporting Goods has also had difficulties in Britain.
Just five months after investing £20m in JJB Sports, the retailer was forced to write off its investment last month. Dick’s chairman Edward Stack said JJB’s performance has “materially deteriorated” due to poor weather and low sales during Euro 2012. Stack said last month: “While we continue to believe in the underlying opportunity within the UK sporting goods market, in light of these developments, we have determined to fully impair the value of our investment.”