International expansion may afford growth opportunities, but it can be a property minefield. Nicola Harrison considers how to invest wisely in overseas territories.

When is a handshake not a handshake? When you are in certain European countries doing a property deal, it would seem. According to David Harper, chief executive of property agent Harper Dennis Hobbs, which advises retailers including Aurora on its overseas expansion, the quirks of certain markets can get an ill-prepared retailer in trouble. “In Finland and Holland, if you go and look at a building and say £100,000 sounds like the right price, and shake hands on it, that’s a binding contract,” he says. “There are lots of ways to slip up.”

Global expansion offers many fruits – the prestige that comes with success on a global scale, as well as new customers and revenue. But there are risks attached, and those that get it wrong can find themselves beating an embarrassing and costly retreat.

So how best to avoid becoming a tombstone in the graveyard of global expansion? Before committing to any new territory, work out if there is a market for what you are selling. Are there similar brands operating successfully in that market? Or is there a gap in the market to be exploited? Do you have any brand recognition, and if not, how hard will it be to build up?

Research the idiosyncrasies of each market, says Mark Burlton, head of EMEA cross-border retail at Cushman & Wakefield, which advises retailers including JD Sports, Ted Baker and Hotel Chocolat on overseas expansion. He lists employment law, health and safety and shop fitting as just a few operational functions that differ from country to country.

CBRE head of EMEA cross-border retail Peter Gold says: “Every country has its own little set of challenges.” He points to France and Italy where capital payments must be made before entering a lease.

While retailers outside the UK may not have to deal with the burden of business rates, there will be other costs to look out for. Doing the maths before you agree terms is paramount.

“Retailers need to be very disciplined about their approach to costs,” says Burlton. “You need to be very aware of what your turnovers will be. Your real estate costs should not be excessively high in a new market to give you a bit of wiggle room if you don’t get it quite right at first.”

Property agents may work differently abroad, and the fees can be much higher than in the UK.  Harper points to Switzerland, where agency fees can be as much as 40% of the rent, compared with about 10% in the UK.

Burlton says though, that of all the costs associated with opening shops, it is the UK business rates fee that is the most irksome to retailers. “Business rates in the UK is the most egregious one. American brands say about rents on Oxford Street, ‘wow that’s expensive’. Then you tell them about business rates and their jaw falls on the floor,” says Burlton.

Once the homework has been done and a decision is made to enter a market, the next big question is whether to use franchise partners or to go it alone.

Franchising is a lower cost way to expand into unfamiliar territories. Franchisers can be relied on to know the market and its quirks, so their knowledge can be invaluable. Jones Lang LaSalle head of retail Guy Grainger says: “The real debate is franchise or company owned. Franchise is often the route taken as it is low risk on capital investment.”

A number of retailers including Mothercare, Aurora and Hamleys have all used the franchise route fairly successfully.

However, Grainger says there are disadvantages to the model, including the franchise partner not always having the same outlook or appetite to expand as the retailer wishes.

Gold says it may be that the franchise partner might have the desire but not the funds to expand at the rate the retailer wants. He adds: “Someone who’s a good partner for you today might not be tomorrow.”

Gold has noted that the company-owned route to expansion is becoming more popular.  It may be more expensive and require more investment up front, but it enables the retailer to have control of its brand. CBRE’s How Active Are Retailers in EMEA? report last year found that of the retailers surveyed in the region, less than 10% use the franchising model only. Just under half (47%) prefer to operate their own stores while 46% opt to use a mix of both.

Fashion retailer Supergroup, owner of brand Superdry, operates a dual model. Grainger, who advises SuperGroup, says it is necessary to have a franchise partner in some territories, whereas in others a company-owned approach is better. “There are some locations where franchising is almost essential, such as the Middle East and parts of Asia,” he says. “Because some markets have very local idiosyncrasies, it’s important to have partners in these cases.”

Bookseller and stationer WHSmith and fashion brand Topshop use a mix of franchise and company-owned models. When Topshop launched in the US, it opened concessions in Bloomingdales to test the market. It then launched online before opening large, statement company- owned stores in cities such as New York when it was convinced there was the demand to justify a serious investment. In Australia, it operates franchised shops.

However, Gold points out that some brands have been hindered by a mixed approach, including Spanish fashion brand Mango in the UK. Sometimes it can be difficult having a two-pronged approach within the same market, as both arms often compete for the same locations, he says.

Gold notes that as well as there being an increasing willingness among British brands to expand abroad, there is also a willingness to adopt flexible approaches as never before, including a mix of franchise and company-owned models, joint venture partnerships and launching online.

The internet is becoming a popular channel to test unchartered territories. It is relatively low cost, and the data provided via delivery addresses can show a retailer where there are pockets of interest where it may be worth opening stores. Bonmarché launched online globally in October in order to do just that. Next is also practising a similar strategy, focusing on launching into new territories online.

Getting it right

Gold says: “It’s fundamental to understand where your brand will be strongest. The internet can help tell you where customer appetite is strongest, and it’s low cost.”

Those retailers that have had to pull out of territories usually make classic mistakes, such as not adapting an offer for a local market, while other retailers found it hard to build enough scale to make it worthwhile. Argos pulled out of India in 2009 as the business had not performed as planned “to support the investment needed”.

Getting the offer right for the market is essential. Marks & Spencer suffered a blip in China in 2009 when its sizing catered more to the British customer than Chinese. It later amended its offering. And B&Q is reviewing its China operation because it offered a very European retail experience to a very different Chinese consumer.

B and Q has experienced just how much Chinese consumers differ to those in Europe

B and Q has experienced just how much Chinese consumers differ to those in Europe

Harper says one retailer that adapted its product and is seeing success as a result is Karen Millen, which he advises. “They have got it exactly right. They’ve got great product, and they listen to local markets and modify product accordingly,” he says.

It is important to know where in the market your brand sits, according to Harper, who says that often a mid-market brand in the UK will open in Europe pitched at a higher market to compensate for the extra costs of setting up an overseas operation. Harper says retailers must get their pitching spot on so they open on the right streets next to the right retailers.

In terms of location, Burlton says think about where your best store is in the UK, and try and think of the equivalent street in the country you are expanding in: “What is the nearest thing to your most successful store? Where is the Regent Street of Japan, New York or Paris?”

Burlton says there is no perfect number of stores that a retailer should launch with, adding that it will differ between brands and also territories, but advises: “Make sure the stores you open are the ones you really believe in and won’t stretch you too much on costs. Open one, and take learnings.”

Particularly in light of the global downturn, retailers are becoming more cautious, according to CBRE’s report. It found that of those global retailers planning to expand overseas in 2012, 71% are planning more than five stores, compared with 75% the year before.

With retailers adopting a more cautious outlook because of unstable economic conditions, it is even more critical to invest wisely in overseas territories. Testing the market and doing the necessary research is a must, and – despite the nuances of cultural greetings – the prize is worth it. 

The landlord’s view

Karolin Forsling, retail manager of developer AMF Fastigheter, which operates shopping centres including the Gallerian in Stockholm

Forsling says those retailers that do best when entering the Swedish market are the ones that garner views from a range of stakeholders before entering, “not just the property owner”. She says: “Walk Stockholm, talk to someone who knows the market. Stockholm, for example, is changing, we are developing the city so much. Today a street may be classed as a B location but tomorrow it could be an A location.”

She says a good way to try the market is by opening pop-up stores – AMF Fastigheter has dedicated spaces for pop-up shops in its centres for this purpose.

Certain British brands do well in Sweden, according to Forsling, such as Oasis and Topshop, whose stores in AMF Fastigheter’s centres are “going extremely well”.

River Island – which is looking for Swedish stores – should also do well owing to its appeal to a younger audience. Superdry is also becoming an in-demand brand forSwedes, says Forsling.

Retail case study

JD Sports Fashion has embarked on a bold global expansion strategy, choosing to acquire entire businesses rather than purchase stores piecemeal

  • The acquisitions were not just property deals designed to help expand the store portfolio. The sports retailer has kept on the brand name of all its acquisitions and is trading the fascias
  • The retailer is new to overseas expansion. It made its first international foray – other than Ireland – in 2009 when it acquired Chausport SA of France for €8m (£6.7m) plus €2m (£1.7m) of debt. Chausport had 78 stores at the time of purchase. JD is reshaping the store network by opening larger locations and expanding into the provinces, while benefitting from Chausport’s distribution network and expertise to introduce the JD format to France
  • JD then turned its attention to Spain, snapping up a stake in Spanish sports and clothing retailer Sprinter, which has about 50 shops, mainly in Andalusia and Levante. The retailer plans to open JD-branded shops in the country in the coming months
  • Last year JD strengthened its position in the Republic of Ireland through the acquisition of Champion Sports, adding a further 22 stores to its portfolio
  • JD now has 600 shops, including more than 70 in France and 50 in Spain