Brian Hume discusses impact of Influx of International Retailers


Brian Hume, Managing Director at Martec International, and Retail Business Technology Expo and Cards & Payments Solutions steering committee member discusses  international retail solutions.

Chicago based, German owned Crate & Barrel is planning to bring CB2, a smaller version of the Crate & Barrel concept to the UK.  Joining CB2 is Marmot.  Hailing from California, the outdoor clothing and equipment retailer is looking to open stores across the South-east and in London, and there’s Kate Spade, the womenswear brand opening a Sloane Square store.  European fashion retailers are also UK bound.   Spanish retailer Coolway is looking at stores in London and Bluewater, and Portuguese based Sacoor Brothers, a fashion and lifestyle brand, is eyeing stores across the South-east.   These retailers join American Eagle, Forever 21 and Victoria’s Secrets in opening new stores in the UK, and the latest news is that Bosideng International, one of China’s largest retailers is opening its first UK store in London’s South Molton Street.

Recent research from the US, by KPMG showed that an overwhelming majority (72%) of American retailers reported having a ‘great deal’ of cash on their balance sheets and nearly half of them plan to invest some of it on information technology going forward.    47% of the retailers surveyed plan to increase spending on IT over the next year, with 29% planning to invest in geographic expansion.

In contrast, in the UK Thorntons is closing 180 stores, with long-established retailers such as Oddbins, Focus DIY, Habitat and Jane Norman in hot water, and research conducted by Martec, in association with BT Expedite, revealing that in 2010 and 2009 IT spend was 1.1% of sales, and had remained at 1.3% for the previous four years.  This year it has dropped to 1.0%, but it should be noted that eCommerce spend is now sometimes funded from marketing budgets rather than IT.   eCommerce and mCommerce are the top investment priority for UK retailers (23% vs. 17% last year).

So, how can international retailers thrive in such a challenging market, and what can UK retailers do to stand their ground?

Firstly, you need to look at the prime motivators for retailers looking to expand overseas.  The simple answer is that they they’ve run out of room in their own territories, and there’s no more room for growth in their domestic markets.  Economic pressures are forcing businesses  overseas, and eCommerce makes it easier, less risky and is now cheaper than ever before.  Previously, overseas expansion was expensive and high risk – you only need to look back to Marks and Spencer’s foray into Germany in the 90’s to see how badly things can go wrong.   Now it’s a different story.  eCommerce allows for retailers to dip their toes in the water, in a low risk and fairly low cost manner.

There are a number of steps that retailers can take when extending their websites, which act as building blocks to overseas expansion.  For example, US retailers can potentially start with their domestic US website, increasing functionality to take orders from international customers, shipping and taking payments in dollars.  The next step is to move to other currencies, then opening distribution centers in the area they’re looking to move into, which will cut delivery time and reduce fulfillment costs.  This method allows retailers to evaluate where the orders are coming from, and identify where the volumes are higher, and can help in the decision as to where to open stores and start trading.  eCommerce will also provide a benchmark as to whether consumers like your product and brand, at a cost where it’s fairly easy to pull out if the signals aren’t right.  Overseas expansion can be high risk, but eCommerce does make things a lot easier.

Once a retailer has established there is an opportunity to launch overseas, there are a number of other issues to consider.  Firstly, leases.  In the US, leases tend to be around 5 – 7 years.  In the UK, it’s more like 15 years.   (It’s also been reported that Topshop’s parent company Arcadia, Dixons and Mothercare are all coming up to a significant number of lease renewals and reviewing whether they need as many stores).   So the lifespan of lease’s can be a barrier to retailers entering the UK.  Occupancy costs as a percent to sales are higher in the UK than the US, notably because rents are higher.  But energy is also a consideration as the UK Government’s green agenda is driving energy costs up faster.  In many cases, energy costs exceed 3% sales, more than twice the IT budget.   An eCommerce launch first allows foreign retailers to establish a presence and start building their brand with consumers without worrying too much about this issue.  However, it does come into play as soon as they open stores.  In the current market these factors are partially offset by landlords becoming more realistic about rents as the number of boarded up shops continues to rise.  Crate and Barrel, for example, is looking for small 5,000 sq ft stores to launch its smaller format CB2 stores, and until recently had avoided expanding in the UK as it had been put off by the high rent required to secure a store.

So what else do retailers need to bear in mind when launching overseas?  Of course there are the cultural differences, coupled with the style and product.  But there are also more practical issues.   In the UK we have VAT, in the US sales tax is in operation, with a vast range of different systems across the globe.  All of these practices operate differently, so the retailers IT systems must be geared up to cope with this.  Likewise, payments systems vary.  In the US, PIN’s aren’t used except at ATM’s, with signature verification used in stores.    According to Retail Week, in Germany, online bank transfers and PayPal are the top two payment methods.  Japan, which is the third largest eCommerce market, operates a combination of credit cards dominating online purchasing, with cash on delivery remaining popular.  Looking at Chinese consumers, cash on delivery is used by 40% of online shoppers, with couriers collecting cash on behalf of the etailer.  5% of Chinese people own a credit card, compared to 60% in the US.

Nowadays we have a more global approach to EDI (electronic data interchange) standards, but there may be transition issues to consider for retailers with older systems.  Date formats, spelling, languages and character sets can be different country to country.  While most retailers won’t worry about spellings in the back office, it has to be correct on anything customer facing.

Some countries, such as Italy and Hungary, mandate fiscal POS terminals or cash registers.  In these countries, POS terminals must have a secure audit roll that can only be accessed by the local tax authorities to record all sales transactions.  Companies like NCR and Epsom make special products for these markets.  Accounting standards can be different country to country.  Legislation relating to sales and promotions can also be very different.  In France, for example, retailers need the permission of the local mayor before they can clear surplus stocks by selling them for less than cost price and sales are restricted to twice a year.  Planning permission for new stores can be much harder to achieve and some countries impose limits on the size of stores that can be built.  Restrictions on Sunday trading laws vary greatly country to country.  Labour laws and employment protection laws are very different and some countries have a much greater incidence of full time store employees rather than others.  Sizes can be another big issue.  The US, UK and mainland Europe use different size scales for clothing and shoes.  The US works miles, yards, feet and inches, and gallons or quarts for liquids such as petrol and milk while Europe is metric.  And a US gallon is smaller than an English gallon.  In Asia, consumers have different body shapes to Europe, so scaling of garments needs to reflect this, increasing manufacturing costs.  These factors all contribute to increased workload and costs when moving overseas.

Traditionally, US retailers like to come to the UK first for international expansion.  As well as the obvious similarities of language and culture, our legal code is very similar, which helps keep the initial operating costs down.    So with more US retailers coming to Europe, what can retailers in the UK do to help compete with overseas competition?

 

UK retailers have the advantage of better supply chains and generally better supply chain expertise.   A US retailer may order 20,000 dresses, which will typically all be pre-allocated to stores at the time of the order, which may be months before it goes on sale.   Often, UK retailers will keep 30% of an item in their warehouse(s) initially, and then move it quickly to areas where the product is selling well, responding rapidly to actual sales.  US retailers with 100% pre-allocation will react to sales by reducing prices faster and run with higher markdowns, but UK retailers can finish the season with a higher achieved margin.  US retailers will need time to figure out the impacts of some of their operating policies that make sense in a country as vast as the US but work against you in a country the size of the UK.

 

US retailers tend to be very aggressive when it comes to promotions and they tend to promote more frequently than UK retailers.  They induce more peaks and troughs into their seasonal sales patterns by doing this and make things like labour scheduling harder.  In general, the UK is better at planning, especially in seasonal merchandise.  Most retailers in the UK use the WSSI (Weekly sales and stock intake) discipline, which is effectively another name for open to buy management.  The major difference is that UK retailers do it weekly rather than monthly and this makes them more responsive.  (Of course, it’s coupled with a responsive supply chain).

 

It sounds obvious, but look at promotions and make them intelligent.  Use our superior planning skills to advantage rather than following US retailers to the bottom.  Initial markups are often smaller in the UK, because subsequent clearance markdowns are also smaller.  This can make our initial prices more competitive with less need for promotions and promotion frequency that shatter price credibility.  But watch out for service.  How many times have you visited the US, shopped in stores and remarked on their superior service.  If this is one thing they bring to the UK and it forces you to match them, the UK retail industry will have been well served.

 

 

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