Options for structuring your business when expanding overseas
The retail press has in recent times been full of articles about UK-based businesses expanding overseas. Expansion overseas can offer businesses a chance to compensate for the current difficult conditions experienced on British high streets. It can also provide access to untapped markets, such as the rapidly growing asian, BRIC and Middle Eastern Markets, and exposure to a more favourable business climate or simply an opportunity to increase brand exposure and test new business propositions.
Implementing the right operating model can be critical when expanding into new overseas markets. This article sets out, in high-level terms, the principal structures underpinning the most common operating models and highlights some potential advantages, as well as pitfalls.
CONCESSION AND DISTRIBUTION ARRANGEMENTS
Using a local distributor is one of the simplest ways to expand into new markets. Distribution can take the form of a concession arrangement (typically, a business operated under a contract or licence within someone else's premises) or a wholesale model.
Distribution is a relatively cheap and low risk way of testing a new market and raising a retailer's profile in a new location. Flagship department stores overseas may be seeking brands new to their market and may be attracted by product ranges not previously seen by shoppers in their country or location.
Franchising has been used as part of an international growth strategy by numerous companies including Marks & Spencer, Burberry and Zara. A franchise involves the grant of a right to use a product, trademark or logo held by the franchisor in return for the payment by the franchisee to the franchisor of a fee.
The franchise model is fairly common; it represents a relatively easy and low-cost means of launching in a new market. Sometimes it is employed out of necessity since in some markets (such as the Middle East) other structures are not available to foreign-owned businesses.
As with concessions, lack of control can be a disincentive to some franchisees. Progress is also heavily influenced by the identity and behaviour of the franchisor, for whom preserving brand reputation can be paramount.
A joint venture – or JV – involves each partner bringing certain assets and/or expertise to the venture. As with franchising, the JV model is often used in countries where foreign entities are not allowed to own businesses outright.
A JV offers a higher level of control than franchising, involves a relationship with a single local partner and provides access to the JV partner's knowledge of their country and the ability to share cost and risk.
Practical disadvantages for a brand owner may include relinquishing some control and flexibility (both financially and operationally) to the JV partner, tensions arising from the legal JV agreement governing the relationship between the venturers – for example around consent or control rights – and a clash of corporate and national culture.
Building an own-store retail portfolio afresh may be an option for some retailers. Launching a new brand and acquiring or building a real estate portfolio is, however, an expensive and high risk way to enter a new market.
While organic growth is an option which offers tight operational, brand and financial control for a retailer, the cost may prove prohibitive when weighed up against the benefits.
MERGERS AND ACQUISITIONS
Building a retail operation overseas organically may present too many obstacles for some. Establishing a presence by merging with – or acquiring – a local retail chain may therefore be an attractive option. An example is the acquisition by Louis Vuitton Moet Hennessy of Sacks, Brazil's leading beauty retailer.
Advantages include the retailer having full control of the undertaking from the outset, as well as giving immediate presence, market share and impact in the new territory. The acquisition process itself can, however, be an expensive and time-consuming way to move into a new market and subsequent ownership can be high risk and can continue to be costly.
This is a relatively low cost way of accessing a new market and testing local appetite for a brand. Retailers will need to invest time and money in ensuring that they are compliant with all local laws and regulations for the territory into which they are selling, that their website is translated into the local language, that the currency options open to customers are flexible and that their distribution infrastructure can support sales made.
Numerous other matters need to be considered on a case-by-case basis, including local employment and real estate laws, brand protection, insurance and tax. The range of different operating models mean an appropriate solution should be available for all those retailers wishing to take the next step in the evolution of their business by expanding overseas.
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