Hun­gry for shop­pers, U.S. re­tail­ers look to de­velop in­ter­na­tional tastes

Austin American-Statesman - - BUSINESS & PERSONAL FINANCE - By San­dra M. Jones

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.

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