UK: Scaling An E-commerce Business

Last Updated: 22 September 2011
Article by Richard Kemp

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Ever since the first US PC hardware and software companies started going international in the early 1980s, executing on the step change when international revenues take off has been a difficult phase for young technology companies.

The bind: so much to do, so little time

At a time when growth and development at home are absorbing all their bandwidth, management has another big challenge: the competitive window to scale up and maximise international opportunities is typically shorter than management realises at the time; and what it needs to do – setting up and managing local sales and marketing operations in unfamiliar countries and making sure they have the planning, staff, money and other resources to do it properly – is generally more extensive than first appears.

The tendency is just to focus on those who are getting it right – in the Internet space, Amazon, Google, eBay, Apple, Expedia and more recently Facebook and Twitter – but many once promising, high growth technology businesses get stuck at this point, and case studies abound of companies that failed to make it past this level for one reason or another: giving too much away to local distributors; not hiring in talent at the right level; loss of key staff to competitors; misreading of the local market; lack of strategic planning; not enough cash to do it properly; taking the eye off the ball at home; even an onerous property lease.

International e-commerce scaling – right place, right time

As e-commerce develops and starts to challenge traditional retail from a position of strength, we're seeing many e-commerce businesses starting on the international track, and this alert aims to kick off a theme in our marketing over the next 12 months around scaling an e-commerce business internationally. We'll be amplifying this through roundtables and practical guidance in 2011/12, providing hopefully more than just the 'plain vanilla on the legals'.

In its July 2011 piece on the collapse of book chain Borders, the FT reported on what it saw happening in the USA1:

"The broadening range of goods online and people's growing comfort with e-commerce is well-known: that is why online sales are growing at or above 15 per cent year on year, reaching $46bn or 4.5 per cent of all retail sales in the first quarter [of 2011]".

The FT pointed to the "slow death of diversity across big retail", articulating one rule for physical goods, that each product category:

"has room for just one specialist chain, competing with Amazon, the world's biggest online retailer by sales, and Walmart, the dominant mass merchant";

and a second for digital content:

"in music – first sold in hard copy online and now easily digitised, like books – not even one national chain has survived".

Digital marketing and e-commerce specialist econsutlancy.com Limited2 in a report from October 2010 entitled 'the Internationalisation of E-commerce – a Best Practice Guide'3 set the scene for what it sees as a fast, competitive growth scenario as e-commerce scales internationally:

"Around 85% of worldwide internet users buy goods and services online4. Europe accounts for 35% of global online spending, which is expected to reach €550 billion in 2010, according to the IMRG. According to Nielsen5 79% of online European consumers plan to make an online purchase in the next six months. ... From an internationalisation perspective, European markets represent a huge opportunity both for US retailers wanting to expand and also for UK retailers looking to enter new markets."

Taking this as our start point, the applied legal analysis is this: although the window for international e-commerce scaling is well and truly open, our experience as a law firm active in this area is that the window never stays open as long as management would like; and our insight is that competitive pressures means any company's edge at this stage rarely stays sharp for more than a few months – say three to six – and there is so much to do in that time to make best use of it.

Scaling an e-commerce business – accessing finance

The cardinal, if counter-intuitive, point for a successful national e-commerce operation embarking on international expansion is that more is often less in terms of risk, so consider whether a 'big bang' rather than a purely incremental approach will best achieve strategic objectives. This means having access to the funds and expertise needed to plan properly, understand each new market, hire the right people and get the right operations in place.

For those who have done this only on a limited basis before, accessing expansion capital is a minor art form, with highly sophisticated capital providers who operate on the basis of a developed market practice that ebbs and flows with the cycle and the perceived attractiveness of the sector, both generally and more specifically as to the particular offering.

Knowing upfront what are the rules of the dance, for example about what you'll have to give up - how much control and influence the development capital provider will want and get - in return for the investment can make all the difference in what is frequently a challenging experience. Our corporate team, in advising companies and investors alike on many deals like this in the last few quarters, is adept at guiding management teams through the currents and shoals to get to yes.

You've got funds - what next?

When you've got the funds, executing on the strategy is top of the agenda, and here econsultancy have given helpful pointers in their '11 Cs of e-commerce internationalisation'6. We'll be looking at this in greater detail over the coming months, but here's a quick checklist of the legal issues that will repay careful attention sooner (at planning) rather than later (at execution):

  • check whether your business will be eligible for any local grants in the country/ies you'll be going into;
  • get the tax structuring right: you only start with a blank sheet of paper once, so take the time to get the structure right from the outset – it can be costly, in terms of unplanned tax charges, to change later on;
  • identify local counsel/advisors in each of the countries you're looking at with relevant experience – firms and lawyers that have been there, done that. For the USA, the UK's real estate and employment laws7 are the main areas of substantive difference in practice – much of the rest in the UK will be recognisable to a US lawyer or VP International. In continental Europe, employment laws differ widely again, and, more generally, the legal regime (for e-commerce as well as other areas) tends to be more regulated and interventionist than the Anglo-Saxon legal model;
  • in hiring your international management, operations and local staff, make sure you get local employment law advice in the countries where they will be carrying out their duties – there are big differences in practice between the USA and the UK, on the one hand, and continental European countries, on the other;
  • if your business is involved in digitised content, check under local copyright and other intellectual property (IPR) laws that you have the licences (from your suppliers) and/or all other IPR that you'll need;
  • if you're e-tailing physical goods, check that you have the right contracts in place for all relevant aspects of the supply chain – from website/e-commerce development/hosting, through to payment processing, etc., to warehousing, logistics and fulfilment;
  • make sure you get local legal advice on, and implement compliant processes for each of:
    • website terms of use/accessibility/localisation/SEO (search engine optimisation);
    • marketing, advertising and databases;
    • domain names and local brand IPR;
    • payment and security; and
    • privacy/data protection; and
  • get and keep up to date with changing EU e-commerce regulation – in areas like distance selling, unfair commercial practices, consumer rights and data protection.

Footnotes

1. 'Borders collapse signals a new retail chapter, Financial Times, July 22, 2011: http://www.ft.com/cms/s/0/20fdefdc-b479-11e0-a21d-00144feabdc0.html#axzz1XfNyiVc7. In the UK, UK internet retail starts from a higher base, already accounting for 10% to 15% of the total, and sales are growing at over 10% year on year: see 'the connected kingdom: how the Internet is transforming the UK economy' (Boston Consulting Group in a report from October 2010 commissioned by Google): http://www.connectedkingdom.co.uk/downloads/bcg-the-connected-kingdom-oct-10.pdf

2. http://econsultancy.com/uk/about

3. http://econsultancy.com/uk/reports/the-internationalisation-of-e-commerce

4. Econsultancy saw books, clothing/accessories/shoes, airline tickets, electronic equipment and tours/hotel reservations as the top 5 products and services global consumers expected to buy online into the first quarter of 2011, accounting for 46%, 36%, 32%, 27% and 26% of total retail sales for each category.

5. 'Global Trends in Online Shpping: A Nielsen Global Consumer Report', June 2010: http://at.nielsen.com/site/documents/Q12010GOS-OnlineShoppingTrendsJune2010.pdf

6. (i) Country; (ii) Customers; (iii) Communications; (iv) Culture; (v) Customer service/proposition; (vi) Competitors; (vii) Currency and payment options; (viii) Conversion (customers); (ix) Channels; (x) Content; (xi) Costs: 'the Internationalisation of E-commerce – a Best Practice Guide', pages 22 – 26.

7. See our Guide to UK Employment Law: http://www.kemplittle.com/html/stay-posted/publications/employment-guide.html [please note - this is still pointing towards allocating risks in IT contracts]

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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