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Rewards and risks of international expansion


With images of rioting and looting on the streets of the UK still fresh in the memory of many businesses, overseas markets may seem increasingly attractive to domestic retailers.

Consumer spending in this country has remained depressed for the whole of 2011 and is not likely to get much better in the short term with inflation set to rise further on the back of higher commodity and fuel prices.

The continuing debt crises in the US and in Europe have rocked the world economy enough to make any company question whether expansion into foreign territory would be a wise move right now, but it is clear there are many opportunities available.

Growth in the so called BRIC countries (Brazil, Russia, India & China) has remained strong this year and there are numerous other emerging markets with burgeoning tastes for British consumer goods.

“There are certainly lots of attractive markets out there for brands,” John Enstone, Partner at international law firm Faegre & Benson, told Retail Gazette.

Enstone works on a broad range of legal issues for North American and European firms operating internationally and he suggests that the Middle East in particular offers a rich vein of opportunity for global businesses at present.

“Its not just Dubai, although it receives a large amount of publicity, the level of wealth and western-focused consumerism across the region is very high,” he continued.

Anecdotal evidence supports this view, with both Westfield and London’s West End shopping area recently reporting sales surges thanks to increased visitors from Middle Eastern countries.

Chinese shoppers are also drawn to British brands, particularly of the luxury variety, and this has led to firms such as Burberry, Mulberry and Ted Baker all increasing their store presence in the South-East Asian country of late.

It is not only high end fashion which is having its head turned by far away lands, and plenty of UK high street mainstays such as Marks & Spencer and WHSmith would also like to attract newly cash rich consumers who have an underdeveloped domestic retail market.

The caution for these firm is that it is one thing to identify an opportunity but quite another to exploit it, and it is undoubtedly harder to turn a profit offshore than it is at home.

Hiring and training the right management team who will properly represent the company overseas can be costly and difficult process, cultural difference will intensify scrutiny and many nations, such as China, require business ventures to be majority owned by a domestic partner.

“This can come with major pitfalls,” claims Enstone.

“Not only could you end up being fleeced by any potential partner if the venture fails but it may be very difficult to extricate yourself from the relationship and/or find a replacement. Even the best prepared can make an error in this way.”

Understanding local taxation and protecting your intellectual property from potential imitators with patents in every country you operate in is also now an essential part of the process.

Dipping an online toe into a foreign sea can be a good way of testing how warm domestic consumers are to your offer and making sure there are no hidden surprises lurking beneath the surface.

But even this can be fraught with dangers as online fashion giant found out earlier this year, when German menswear specialist Anson made an appeal to a Hamburg court to ban the British trader from using its name in the central European country for fear of confusion.

This may seem like a case Asos is likely to win however the British e-tailer giant has already lost out to an EU-wide trademark application made by Swiss cycling-clothes trader Assos under similar grounds, although it is now appealing this decision.

If a retailer does not have a country-specific top level domain (ccTLDs), .de for Germany or .es for Spain for example, when setting up a foreign website it can make it hard for customers in that country to find you online.

Hugo Dalrymple-Smith, Director of UK Operations at domain marketplace Sedo, argues that this can make a huge difference to growing businesses and although the addition of an – or _ to an address should not ruin your visibility on Google, it does produce inconsistency for your branding.

“Essentially, if you are a retailer looking to expand outside the UK, then it is advantageous to obtain your brand’s ccTLD for the territories you are planning to move into,” Dalrymple-Smith explained.

“It will not only have a beneficial effect on your search rankings, but also allow you to protect your brand within your own emerging markets.”

Some retailers have been leaping into emerging markets for several years now without the luxury of an e-tail dry run however.

Mothercare now has 61 stores operating in India alone as it has looked to capitalise on the booming baby population of that nation and has now similarly expanded into China in recent years. To date, this gamble appears to be paying off.

In its last full-year financial results the trader announced a £25 million fall in UK profits whilst international profits grew 18.5 per cent to £27.5 million, leaving onlookers unsurprised when it confirmed it plans to cut around a quarter of its domestic stores and further increase it overseas presence.

India is a notoriously difficult country to do business in however due to graft & red tape, and Kelloggs’ well-known failure to convince the nation to eat Cornflakes shows that not all western products are immediately transferable to an international market.

Enstone commented: “India is a tough market but so is China and Japan.

“Retailers need to consider problems faced by others in their sector when entering a particular market and if they are problems a company does not have a taste for, can’t deal with or will expose their business, then find another market.”

It may be difficult but these emerging nations also have emerging retailers and so British companies may want to act quickly as the opportunity for foreigners to exploit consumer demand in these market will not last forever.

“It is all a learning curve and those which have taken the plunge in one or two different environments tend to be better at evaluating the risk and getting it right in new markets,” Enstone concluded.

Published on Friday 26 August by Editorial Assistant

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