Hungry for shoppers, U.S. retailers look to develop international tastes
As Americans’ love affair with shopping cools, retailers are venturing overseas in search of growth.
Bloomingdale’s and Crate & Barrel each opened their first store outside the U.S. in Dubai this year. Abercrombie & Fitch just opened its first store in London. Sears has begun shipping tools and clothing to 90 countries. Macy’s Inc. is looking at going into China. And Target Corp., the discount chain that for a decade has resisted Wall Street pressure to expand internationally, revealed this spring that it wants to open stores outside the U.S. and is looking at Canada, Mexico and Latin America.
Even Wal-Mart Stores Inc. — the retail behemoth that has been operating internationally since 1991 — made clear at its annual meeting in June that it was counting on consumers outside the U.S. to make up for stalled sales at home.
“In the 1990s and early 2000s, the U.S. was growing at a healthy clip compared to the rest of the world,” said Frank Badillo, senior economist at Kantar Retail, a retail research group. “There are now growing doubts as to how fast the U.S. can grow going forward, and that’s given lots of retailers reason to look elsewhere.”
Unlike with Nike sneakers or McDonald’s hamburgers, the selling of general merchandise has historically been a parochial business. With few exceptions, most of the nation’s retail chains have stayed close to home, basing their expansion plans on the vastness of the American landscape and the U.S. consumer’s seemingly insatiable appetite.
Now, in the wake of the recession, that longstanding formula has lost its allure.
Two out of three Americans say they have cut back on spending since the recession began in December 2007, according to a survey by the Pew Research Center’s Social and Demographic Trends project. And even accounting for the thousands of stores that closed during the economic downturn, Americans are still overwhelmed with opportunities to shop.
Still, setting up shop overseas is no sure thing. Understanding local tastes, adjusting to
‘In the 1990s and early 2000s, the U.S. was growing at a healthy clip compared to the rest of the world. There are now growing doubts as to how fast the U.S. can grow going forward, and that’s given lots of retailers reason to look elsewhere.’
Frank Badillo Senior economist at Kantar Retail, a retail research group
local culture and analyzing the attractiveness of real estate in local shopping malls and neighborhoods are challenges that have stumped some of the most sophisticated retailers.
Wal-Mart pulled out of Germany in 2006 after eight years and $1 billion in losses, unable to compete with local discounters Aldi Group and Lidl. The Bentonville, Ark., discount chain ran into similar trouble in South Korea, where it also threw in the towel.
Gap Inc., Toys R Us Inc. and Starbucks Corp. — retailers with extensive international businesses — also fumbled their initial overseas efforts before figuring out how to adapt to local tastes and customs.
“The strength of the U.S. retailers has been scale and replication, not ‘How do I flex to the market?,’” said Neil Stern, a partner at McMillan Doolittle, a Chicago retail consulting firm.
Retailers have long known the risks of expanding overseas. But as long as Americans were shop- ping with a vengeance, it was easier to build more stores at home. Now the tables have turned, and the risk of losing ground by avoiding foreign countries is too real to ignore, Doolittle said.
Costco Wholesale Corp., for example, has quietly become a bigger international company than most investors recognize, Credit Suisse analyst Michael Exstein said. About 20 percent of sales and 28 percent of operating profit came from international activity in 2009, and those figures are “set to grow at an accelerating rate,” Exstein said in a report to investors last month.
Likewise, Urban Outfitters is moving aggressively into Europe and Asia. The chain of trendy clothing stores, which include Anthropologie and Free People, is making a substantial investment overseas by paying third-party providers for services including logistics and systems, said chief executive Glen Senk in an earnings conference call this year.
Although relying on local experts is “typically more expensive” than handling overseas operations itself, the company believes the strategy is worth the investment, Senk said. Once the foundation is established, Urban Outfitters can “methodically” bring the overseas operations in-house, he said.
Although Urban Outfitters started doing business in Europe in 1998, its presence there is still small, accounting for about 5 percent of the chain’s sales.
The European apparel market is about 10 percent larger than the U.S. apparel market, according to Urban Outfitters’ calculations, with more than two-thirds of that volume in five countries: Britain, Spain, France, Italy and Germany. Senk estimates he could operate at least 100 Urban Outfitters and 100 Anthropologie stores in Europe.
“Any public retailer’s board and management has to think about what they’re doing internationally,” said Madison Riley, managing director for North America at Kurt Salmon Associates, an Atlanta consulting firm. “You have to be making plans. If you don’t start now, you’ll be in real trouble in the next five to 10 years.”
Loudi, in China’s Hunan province, is one of the overseas markets where Wal-Mart has opened stores. U.S. retailers have long relied on Americans’ traditionally ravenous buying habits, but that strategy has lost its shine as two out of three U.S. shoppers have cut spending during the recession.