The opening weeks of 2012 offered more gloomy bulletins from the high street. January sales slumped, clothing retailer Peacocks and its Bon Marche offshoot sought a rescue and even the mighty Tesco alarmed investors with a sharper-than-expected drop in home sales.

However, less –publicised reports showed several well-known names broadening their horizons and lessening their dependence on the UK market. Tesco also announced that it would open 19 clothing-only stores in the Middle East with a Saudi Arabian franchise partner and Asda swiftly followedwith a similar deal for its George fashion line. Over in Paris sandwich chain Pret A Manger opened its first continental Europe outlet in the La Défensebusiness district, with what chief executive Clive Schleecalled “a menu built on many of the British Pret classics and new products designed specifically for the French market.”

Another international move that made headlines was last October was Marks & Spencer’s launch of a French-language website; prelude to the retailer’s return to France after a decade-long absence with a Paris store on the Champs Elysees opening shortly before Christmas.

The move is just part of what the group outlines as a “strategy to transform M&S into an international, multi-channel retailer and reduce our dependency on the UK economic cycle”. Twelve new openings in the first half of 2011 raised its store portfolio to 369 across 42 countries, but M&S admits that it is still regarded as “a UK retailer that exports” and wants to be regarded as international.

Spanish retail group Inditex, parent of the Zara fashion chain, perhaps offers the best example of how international expansion can more than compensate for a sluggish home market. Spain’s economy is verging on recession and unemployment is soaring – but that is of little concern to Zara, which is now established in 80 countries around the world and opened its first South Africa store in Johannesburg last November.

An example closer to home is Mothercare, regarded as a retail casualty last year when it announced plans to close more than 25% of its UK stores. However what is more remarkable about the group is the maturity of its international business and freedom from any debt load, suggests Tristan Rogers, chief executive of ConcretePlatform.com. “Think of it as spread betting, or working to the proverb of not ‘putting all your eggs in one basket’,” he says. Mothercare opened its one thousandth overseas store last year and has outlets as far afield in Chile, Iraq and Morocco. The group’s latest results show a decline in UK sales offset by a 15% increase for the overseas division.

As the BRIC economies of Brazil, Russia, India and China, together with Mexico rapidly establish themselves in the top ten league of world economies, the annual spend of their middle classes will escalate from around €6.9 trillion to an estimated $20 trillion by the end of the decade – or more than twice that of America’s middle class. “The conclusion is simple,” says Rogers. “International expansion should be mandatory for any brand with a degree of maturity in its domestic market. Without it, it remains too vulnerable from single market dependence.”

He cites the examples of major European retail brands that many Britons have never heard of – “great examples of businesses that have grown without the myopic tendencies of an island mentality” – such as lingerie chain Hunkemöller, established .in 13 countries including Saudi Arabia, Egypt and Russia.“Europe is their immediate market, spreading their stores and products across large geographies and different trading formats. It is therefore essential that they learn to work with distance and different IT – and they do.”

India beckons
Other good news for companies with overseas ambitions is that India may be finally opening up its $450bn supermarket sector to foreign retailers such as Wal-Mart – despite signs of backtracking last December. Multinationals will be allowed to enter without the prerequisite of first finding an Indian partner. Tesco, for example, currently operates a service centre in Bangalore and has a four-year old franchise agreement with Trent, part of the giant Tata Group, under which it provides its retail expertise to the Star Bazaar hypermarkets chain.

Other multinational retailers such as IKEA – which resolutely declined to move into India unless able to do so unpartnered – are now in talks with the government on how it to proceed. India will prove an interesting test case for foreign retailers, suggests Karmesh Vaswani, vice president and head of retail, consumer packaged goods and logistics in Europe at Infosys.

“Only 40% of the population have bank accounts, so there is still a heavy reliance on cash transactions,” he says. “So companies should look at means by which transactions can take place – and payment by mobile phone offers an ideal opportunity.”

Vaswani adds that UK retailers deliberating over possible expansion abroad have two main considerations. One is whether they can continue to achieve positive shareholder returns from the domestic market alone; the other whether maintaining growth and improving shareholder value is contingent on developing an overseas presence.

He believes that while UK retailers should broaden their horizons – focusing particularly on the emerging markets – opportunities remain for them to optimise their business models at home despite the downturn. Those that do opt to expand should avoid the past mistakes of companies that simply attempted to replicate the UK business model in overseas markets

“Innovations that have proved successful here may not necessarily work as well abroad, so seeking out growth opportunities means identifying and exploiting and voids in local markets,” says Veswani. “Tesco has been adept at this; taking their basic operating model but adapting it to reflect local conditions.”

Kees de Vos, vice president of business consulting at ecommerce consultant hybris agrees that ‘localisation strategy’ must be devised and perfected for an internationalisation strategy is to succeed. This means keeping in mind the “realities of consumer behaviour”.

“The majority of consumers lack confidence in making cross-border purchases and still retain a local perspective,” he observes. “So, retailers need to demonstrate they can deliver against local consumer expectations. This means content, product options, services, payment methods – and ultimately territory specific tax and shipping – appropriate to the geographical location.

Stumbling blocks
Marks & Spencer’s response to the opening-up of India’s retail sector was that it intended to work with its local partner, which provided valuable understanding of the market. Franchising has proved an increasingly popular commercial model for retailers expanding overseas adds Rogers, but it’s relatively easy to find a local partner and strike a deal so the devil is in the detail.

“You need to have a tight contract, tight operational models and clear visibility of trading practice and performance,” he cautions. “Without them, you’re flying blind.”
Historically, overseas expansion has meant increased infrastructure and complexity adds Clyde Buntrock, divisional director for Allport Supply Chain management and head of business solutions at ediTRACK. Retailers looking to grow in new markets must be as aggressive in keeping down operating costs as in their home markets and consider issues such as

• if the product is sourced overseas, will it move directly to global markets from source, or first move to the UK to be despatched?
• do variations in culture and seasonality necessitate different product mixes for different markets at different times of year?
• does the retailer work to a push or pull model and will their presence in a new market be owned, franchisee or a blend based on local variability?
• are there product ownership issues and when do overseas outlets take ownership of the product?

Insights from a Japanese company that has expanded globally might prove instructive. E-commerce operator Rakuten has enjoyed rapid growth, with recent acquisitions including acquiring UK online retailer Play.com and e-book business Kobo. The group reports that its research identifies Brazil, Indonesia, Thailand, China and Spain as “leading the global e-shopping charge”.

“Clearly for the international retail community there is a huge opportunity to drive growth in new markets online,” says Rakuten’s head of global business, KentaroHyakuno. “However, international expansion is not right for every business and brands need to consider if their products or services will transfer easily to new markets – and whether their offering is unique enough to take on existing market incumbents with established brand equity.”

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