Global Commerce: How To Assess Readiness And Select Market Entry Points Featured

  • Written by  Lorna Pappas
 

Following is Part 1 of the Retail TouchPoints series, titled: Advances In Cross-Border Trade. This section offers retailer success statistics, then guides retailers in assessing expansion readiness and determining the best countries to penetrate. Part 2, which reviews the next steps in pursuing global commerce, will appear in the June 18 newsletter. 


As competition and market saturation restrict prospects for growth within the U.S., many retailers are looking beyond national borders for new business development opportunities. The promises of untapped global markets, risk diversification and wider margins are alluring to e-Commerce, omnichannel and brick-and-mortar retailers.

But cross-border trade involves more than just transplanting the U.S. business model: The initiative presents streams of potential challenges ― not limited to local laws and preferences, transportation, payment options, cycle times, data access, returns and customer service.

“A one-size-fits-all solution to global commerce and customer service will not serve U.S. retailers well,” said Thomas Quinn, Principal of Deloitte Consulting, in an interview with Retail TouchPoints. “Before crossing borders, retailers must clearly identify the specific needs of target customers to lessen risk and raise the upside potential of new markets. When global strategies are properly executed, retailers will see a strengthening of overall brand perception around the world, adding significant momentum to growth. Financially, global expansion allows the retailer to scale more rapidly, thereby driving improved cash flow and operating profits, and eventually increasing shareholder value.” 

The growth of cross-border sales is set to boom over the coming years, potentially accounting for as much as one third of online worldwide trade by 2020, according to IMRG, an eTail tracking firm: In the near term, the total value of worldwide e-Commerce will surpass $1.35 trillion by the end of 2013.

International expansion is a “high-risk, high-reward proposition,” reported Forbes.com, “and for the world’s largest retailers it is absolutely necessary for growth.”

International Sales Benefit A Variety Of U.S.-Based Retailers

Among the largest U.S. retailers, Costco has seen international business grow faster than in the U.S. (15% vs. 5%). In Q2 2013, significant new Costco memberships came from Asia, where only one store had been opened, but six more now are planned for 2013.

The Home Depot has 280 stores in Canada and Mexico, which in FY 2012 generated net non-U.S. sales of $8.4 billion. Target recently crossed borders by opening 24 stores in Canada during Q1 2013, with plans for 100 more in Canada this year. Wal-Mart, which reported global sales of $466.1 billion in 2012, entered Mexico in 1991, Canada in 1995 and today has 10,000 stores in 28 countries.

Specialty retailers also are benefitting from cross-border sales. At Abercrombie & Fitch, earnings from overseas markets, primarily Asia and Europe, grew earlier this year by 37%, according to a statement by Investors Alliance. Additionally, Investors Alliance reported that  American Eagle Outfitters “sees the Mexican market as a key driver for the brand's success as they continue to penetrate various segments,” including Israel, Japan, the Middle East and Poland. Gap is opening stores in Asia, Brazil, China, India and Mexico; and there is “a lot of growth potential for TJX in the international retailing scene,” according to Investors Alliance, which referenced “high customer traffic in Canada and Europe” for TJX.

At Guess, South Korea and China generated revenue growth rates of more than 25% in FY 2012. An April 2013 Guess investment presentation showed European revenues representing 35% of the company, at $940 million. Revenues from Asia comprised 11%, at $291 million. Currently Guess is eyeing opportunities in Brazil, India and Japan.

Is Your Company Ready To Go Global?

In assessing whether or not a retail organization is ready to go global, company executives must “look inward as the first step to growing outward,” noted a Deloitte industry report, titled: Retail Global Expansion: The Journey Starts At Home: “Having a clear understanding of corporate expansion goals and organizational capabilities is critical to success.”

Deloitte recommends starting this assessment with a candid look at three primary factors:

  1. Goals: What do I want to achieve with the global expansion?
  2. Internal capabilities: Do I have the necessary capabilities to be successful abroad?
  3. Resources: Do I have the talent to manage the global expansion?


In the Retail Global Expansion study, Deloitte offered an example of a completed assessment, as shown in Figure 1 below, as well as a brief evaluation:

“This retailer is looking for high sales and margin growth, has moderate tolerance for risk, and a moderate-fast timeline for execution,” Deloitte said of the sample assessment. Though the retailer has capability gaps in the supply chain, support structure (e.g., legal and regulatory) and expansion experience, there are high levels of capital, which could help “overcome shortfalls in certain areas as they evaluate the various market-entry options.”

An internal evaluation proved valuable for Skin Authority, when considering the potential of expanding globally. The  evaluation focused on current successes, costs of expanding, and available funding. The assessment concluded that for Skin Authority, “it is more cost effective to gain success in U.S. markets, expand those existing bases to full potential, then use that success as a spring board to other markets,” said Ted Hilling, Co-Founder of Skin Authority, in an interview with Retail TouchPoints. “Success locally provides the revenue base to support expansion plans and helps create product interest and support abroad.”

Regulations, packaging, language and even religious influences can impact market requirements, and must be considered as part of the readiness assessment. “It is important to understand the ‘fully loaded’ costs of going international: for example, all packaging, collateral, training materials and in some cases, product assembly, must be localized for each country,” Hilling noted. “Costs also include travel and manpower required for support.” 

Skin Authority relies on solutions from NetSuite to support expansion issues, such as addressing licensing and tariffs on trade business, which also vary by country. As part of an assessment, “be sure to recognize each country’s unique costs as well as exchange rates,” Shilling advised, “because they can create large swings in profit margin.”

In determining readiness to go global, retailers also must assess whether they are prepared to grow through physical stores, e-Commerce-only or multi-channel development. A white paper from Javelin Group, titled: International Retail: New Channels And New Frontiers, offered these assessment considerations: “An e-Commerce-only approach to international expansion offers the cheapest and lowest risk entry, but some retailers have struggled to generate good web site traffic in new markets because of low brand awareness.” However, though expanding with a chain of physical stores “may be more effective than a web site at introducing a new brand or offer to a market, the cost of entry and risk of failure is greater.”

The opportunity for many now “is to develop multichannel operations in new markets, where a few stores can build awareness and support/be supported by a localized e-Commerce operation,” according to the Javelin white paper. “This approach can allow greater and faster market penetration with lower investment than would be possible with either stores or e-Commerce alone. Though no examples exist of a seamless multichannel approach to international retailing, this will be seen in the coming phase of international expansion.”

Considering An Online-Only Approach To Start

While retailers may want to dive into multi-channel retailing abroad, e-Commerce often is the safest way to test countries and local markets ahead of live expansion, reported Chris Donnelly, Managing Director of the Accenture Retail Practice, in the February 2013 Accenture Globalization Index. Launching a web site prior to full market penetration “is the easiest, most reasonably priced and low-risk way to test the market for a brand,” he noted. “This route can also provide retailers with crucial insights ahead of opening stores, including what customers in the region are buying and where those customers are located.”

Additionally, online markets such as Amazon, eBay, Facebook and Google are excellent avenues for testing an online strategy. eBay, which generates 20% of trade volume internationally, “makes it easier for sellers to test multiple international markets then quickly focus on the ones that will give them the best returns to make their international investment a success,” according to the ChannelAdvisor report, titled: A Retailer’s Guide to Going Global With eBay.

A number of companies have found success in using eBay to test and enter new markets. Street Moda, a men’s and women’s footwear company, used eBay to test the UK online market and now is testing Germany. Austin Bazaar, a musical instrument and accessories retailer, leveraged the eBay International Shipping Program to assess and handle various tracking, returns, exchanges, customs and duty issues involved with online retailing.

When choosing potential new online markets, retailers can access recent global market studies such as research conducted by Penton Research and commissioned by EX4, titled: Local Currency Pricing For E-Commerce. The study polled 30,000 online shoppers in Australia, Canada, Germany and the UK concerning their current as well as future e-Commerce habits.

Respondents from the UK were found to be the heaviest e-Commerce shoppers, but Australian shoppers expected the highest increase in online shopping by November 2013, as shown here:

Country

Often Using e-Commerce

Planning to Expand Usage

  by November 2013

Australia

40%

70%

Canada

28%

57%

Germany

38%

35%

UK

62%

63%


As e-Commerce continues to grow worldwide, predicted online shopping volume by market ― as well as pricing, shipping, returns and more ― are key considerations as retailers plan their next steps to global expansion.

 Determining Market Entry Points

A number of factors can influence retailers’ decisions to enter particular markets, including overall market expansion, product-selling potential and ease of transition into the marketplace. Ease of transition played a role for Skin Authority, which first crossed borders into two English-speaking markets: Canada and the UK. Entering countries with few language barriers allowed the retailer to vet potential distribution partners, said Shilling, as well as better prepare for more complex markets in terms of language and customs.

Certainly the ease and reduced risk of entering countries with no language barriers are attractive considerations, but assess the drawbacks: “Even with higher risk,” according to the Forbes article, “many retailers view entry into emerging markets as ‘urgent,’ given the opportunity to establish stores in good locations before the competition.”

That increased risk, as Shilling stated, includes strict compliance with local laws and restrictions, which otherwise can create unforeseen challenges, such as hefty fines for inaccuracies. Availability and visibility of data concerning merchandising, inventory, transportation, receiving, POS, order cycles, staff management, leasing, demographics, partner relationships, shipping and other retail essentials ― already a challenge on home turf ― further complicate the selection of target markets.

In fact, some market dynamics are so difficult, Forbes reported, that good supply chain strategies are simply “impossible to operate. Large retail operators have learned, sometimes the hard way, it is important to hire local managers who understand local consumer preferences and how to market to these consumers. Different tastes mean it is necessary to change the product assortments, adjust pricing and merchandise in-store differently than the companies were used to. Of course, store location is always important and research on real estate takes time and guidance by local experts. Given the capital investment required to open a new store, a bad location can be a very costly mistake.  Too many times companies open stores in locations that are off the beaten path and bring disappointing results.”

To help evaluate potential new markets, Timberland sought help from the Javelin Group. Javelin assisted with a global expansion strategy involving 28 distributor partners and 364 stores in 61 countries.

Timberland first required a strategic evaluation of the key distributor markets, according to Javelin, to determine:

  • In which markets should Timberland take ownership of distribution?
  • Which business development channels should be prioritized in each (e.g., franchise, joint venture, ownership)?
  • What is the size of each market opportunity?


To help answer these questions, a strategic prioritization scorecard examined each country in terms of potential across a number of market and business operation indicators, including market size, urbanization, growth, affluence and modernization; cultural fluidity; and ease of establishing a wholly owned operation. Strategic bundles of countries easily run from a ‘lead’ country were identified, thus increasing the relative attractiveness of individual markets. The strategic market evaluation, stated Richard O’Rourke, SVP of International, Timberland, helped “re-define our expansion strategy for emerging markets.”

 Part 2 of Advances In Cross-Border Trade, covering the next steps in entering new markets, will appear in the June 18 newsletter.

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