International Retail New channels and new frontiers JAVELIN GROUP WHITE PAPER

JAVELIN GROUP WHITE PAPER | JULY 2012 | INTERNATIONAL RETAIL NEW CHANNELS AND NEW FRONTIERS

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Contents Executive Summary……….......…………….…………………………………………….

04

Background …………………........…………….……………………………………….....

06

An Emerging “Standard Model” in International GM Retail .…….......

07

A Strong Domestic Base .........................................………………….........

08

Key Decisions ................................................................……………........

09

Criteria for Market Selection .........................……………………...............

10

The Multi-Channel Opportunity …………………………………..…………………

14

About Javelin Group ..........................................................................

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Appendix 1: Building a Balanced Scorecard ....…………………………………

17

Appendix 2: Tailoring the Offer and Business Model ..........................

18

Appendix 3: Key UK Retailers’ Approach to the UAE and BRIC ...........

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Javelin Group | 200 Aldersgate Street, London EC1A 4HD | +44 (0)20 7961 3200 | www.javelingroup.com

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International Retail New channels and new frontiers Facing a cyclical downturn in their markets at home, UK retailers are now seeking growth through ecommerce and international expansion (indeed, in many cases through both combined). Selecting the best markets for stores, ecommerce and multichannel is therefore a key strategic priority for these retailers and the subject of this White Paper. As a growing number of retailers are demonstrating, once the significant challenges of planning and establishing a retail operation in multiple countries are overcome, the rewards can be very high indeed – in some cases surpassing the profitability of their domestic business.

Javelin Group | 200 Aldersgate Street, London EC1A 4HD | +44 (0)20 7961 3200 | www.javelingroup.com

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Executive Summary Javelin Group’s analysis of major retail markets around the world suggests that some large markets are (or soon will be) ripe for development with a multi-channel approach and that this approach, judiciously applied in well-selected markets, will permit greater and faster market penetration with lower investment than would be possible with either stores or ecommerce alone. To date, no retailer has developed an international multi-channel model of any significant scale. While there are some examples of retailers presenting their offer in new markets, both online and through stores, almost no examples yet exist of a seamless multi-channel approach in multiple countries. This is partly because, to date, retailers have tended to expand their store and online businesses into different territories. International retailers like Marks & Spencer have preferred to develop a store presence in less developed countries, especially those with large cities, fast growing urban affluence, and few strong competitors. By contrast, these same retailers have preferred a localised ecommerce offer in large developed markets with high ecommerce penetration. In consequence, the development of multi-channel outside retailers’ domestic territories has been very limited. However, we believe this will soon change. A constraining factor in the international development of multi-channel retail thus far has been that UK retailers have tended to develop their store presence in developing markets through franchise agreements, which prevent (either legally or morally) the franchisor from presenting a strong localised ecommerce offer which might be seen as competing with its franchise partners. And franchise partners themselves have been slow to embrace ecommerce. However, some master franchisees such as M.H. Alshaya are now investing in ecommerce, having recognised that a strong localised ecommerce site can complement their store network. Javelin Group expects this trend to catch on rapidly and for franchisors to build into their franchise agreements an expectation that franchisees will embrace ecommerce and multi-channel with the support of the franchisor.

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Selecting the best markets for stores, ecommerce and multi-channel is a key strategic priority for any international retailer and the subject of this White Paper. As Figure 1 shows, emerging territories offering good conditions for a multi-channel approach include China, Russia, Brazil and Korea. This is alongside large, albeit slower growing, developed economies such as the USA, Japan, Germany and France. Whilst focussing on these opportunities, retailers should not overlook a second wave of countries with emerging multichannel opportunities including: India, Turkey, Ukraine and Taiwan. Figure 1: Opportunities for UK retailers entering with stores, ecommerce, or both in 2020

Best for ecommerce alone

Best for multi-channel

More attractive

BRA RUS

AUS

POL

ITA CAN ESP

NLD DNK SWE AUT

2 TUR

TWN UKR UAE

MYS SAU

IND

Best for stores alone

eCommerce

CHN

Leading strategic multi-channel opportunities

JAP DEU FRA KOR

Less attractive

1

USA

Second fast growing wave

THA Developed

EGY

Less attractive

IDN

Developing More attractive

Stores

Other strategic decisions include selecting the appropriate operating model (i.e. wholly-owned, JV, or franchise), as well as decisions on the proposition, product mix and branding. Additional considerations include: capital model for stores, the revenue model, mark-up, volume agreements, returns, markdowns, local management, supply chain structure, merchandising and marketing support.

Javelin Group is Europe’s leading ecommerce and multi-channel retail consultancy, and advises on all the “international retail” issues discussed here, from pre-planning to international roll-outs. We also advise retailers and brands on their ecommerce and multi-channel strategies (both domestic and international), store locations, operations, technology strategies, and we build ecommerce solutions. For a discussion about the implications for your business of the findings in this White Paper, please contact Richard F Wolff, Director of Javelin Group’s International practice, at [email protected] or on +44 (0)20 7961 3216.

Javelin Group | 200 Aldersgate Street, London EC1A 4HD | +44 (0)20 7961 3200 | www.javelingroup.com

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Background Javelin Group’s recent White Paper on the future of retail: How many stores will we really need? UK non-food retailing in 2020, identified international expansion as one of six strategic priorities for successful retailers. Facing a cyclical downturn in their markets at home, retailers in the most developed markets are now seeking growth through ecommerce and international expansion, (indeed, in many cases through both combined). As a growing number of retailers are demonstrating, once the significant challenges of planning and establishing a retail operation in multiple countries are overcome, the rewards can be very high indeed – in some cases surpassing the profitability of their domestic business. The list of potentially viable markets has grown significantly in recent years. Growing opportunities in China, India, Russia, Brazil and Turkey, for example, must now be weighed alongside well-established but highly competed markets like the USA and Western Europe. And for each of these, retailers now face many market development options, from ecommerce alone through to franchised stores to fully-fledged multi-channel operations with wholly-owned stores. Amid this complexity, retailers must be very clear on the big strategic questions: 1.

Which international markets to address, and why?  what they are bringing, and how this is distinctive from existing offers  whether the opportunity in that market is sufficient to justify the risk

2.

Which operating model to employ in each target market?  which channels to employ (stores, ecommerce...)  which ownership and control structure to use (wholly-owned, JV, franchise...)

3.

Which local partners to select (where applicable)?

4.

What and how to localise, and how much?  the offer, product mix, seasonality, and pricing  the store model (footprint, operating hours, service levels...)  the ecommerce model (language, currency, payment, marketing, delivery...)  branding and marketing  the supply chain  management team

Selecting the best markets for stores, ecommerce and multi-channel is a key strategic priority for any international retailer and the subject of this White Paper. The appendix of this Paper goes on to provide insight into developing a balanced scorecard for market selection and the approach adopted by leading UK retailers in the UAE and BRIC countries.

Please note: We use the term “ecommerce” in this Paper to embrace desktop web, mobile commerce, kiosks and all other forms of electronic transaction, and recognise that these may be used in different degrees in different markets. China’s ecommerce, for example, is widely expected to leapfrog “desktop web” and develop rapidly on smartphones once these are widely adopted.

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An Emerging “Standard Model” in International GM Retail Until 2000 retailing was a largely national industry with relatively few general merchandise, clothing and grocery retail brands operating across borders. Since the turn of the millennium, these numbers have increased but they remain modest when compared with foodservice retailers like McDonalds and KFC. Figure 2 below shows the international presence of selected European retailers both through stores and with localised ecommerce (website in local language and prices in local currency, typically with local shipping charges and accepting local payment methods): Figure 2: International presence of selected EU retailers (May 2012)

102 81 71

43 42 40 38

34

Number of countries

26 25 24

18

15 13

13

6

6 5 3

3

2 1

Stores eCom Mango

Stores eCom Zara

Stores eCom Esprit

Stores eCom H&M

Stores eCom M&S

Stores eCom Next

Stores eCom Arcadia

Stores eCom Debenhams

-

Stores eCom C&A

Stores eCom Tesco

Stores eCom Boots

-

Stores eCom ASOS

Source: Javelin Group analysis

There are two striking observations from this analysis: first, how few countries are exploited overall when compared with truly international businesses like McDonalds (present in 119 countries) and KFC (present in 109 countries) and, second, how few countries are being addressed with localised ecommerce. We are clearly still very early in the evolution of international retailing.

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Nevertheless, it is already possible to observe the emergence of some kind of “standard model” in which UK GM retailers develop: 





Stores in one or more of three key “developing” territories 1. Central and South-Eastern Europe, Russia and the Ukraine 2. The Middle East and India 3. The Far East (Thailand, Malaysia, Singapore, Indonesia, Philippines) and China Localised ecommerce sites for Germany, France, USA, and Australia  Local language, local currency, local shipping charges, local payment methods “Rest of World” served (at least in parts) by an ecommerce site in English and pounds sterling, offering international shipping rates

Few UK retailers have adopted approaches to international expansion that differ significantly from this model. Carphone Warehouse’s stores across Western Europe and Tesco’s Fresh & Easy in the USA are notable exceptions. This standard model explains why no retailer has yet developed an international multi-channel model of any significant scale. As the model shows, international retailers have preferred to develop their store presence in less developed countries, especially those with large cities, fast growing urban affluence and few strong competitors. By contrast, these retailers have preferred large developed markets with high ecommerce penetration for development with localised ecommerce offers. In consequence, the development of multi-channel outside retailers’ domestic territories has been very limited. Also, retailers have typically preferred franchise models to grow their business in developing markets, in an attempt to reduce the financial risk of expanding internationally. Clearly, this represents a potential barrier to developing a multi-channel approach: franchisees fear the expanding reach of their franchisor partners’ ecommerce channel, concerned that this will divert sales directly back to HQ at the expense of the store network these franchisees have developed locally. However, some notable international master franchisee operators are now seeking to develop their own ecommerce skills, opening up multi-channel opportunities for those western retailers choosing to expand via franchise. The following pages consider the decision process and potential selection of international markets suitable for store development, ecommerce development and multi-channel. We also look at the approach adopted by some UK retailers in the UAE and BRIC countries.

A Strong Domestic Base An essential common feature among all of the retailers who have successfully expanded internationally is a strong domestic base. Unless the retailer can rely on a strong, stable business at home, expansion elsewhere will be an unwelcome distraction. But the nature of that domestic strength can vary widely from one retailer to another; Tesco’s advantage has been rooted largely in its operational efficiency, whilst at Aurora Fashions, the advantage has come primarily from strong product design skills. These retailers are clear about the advantages they bring to their target international markets and why their proposition will be attractive to local consumers.

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Key Decisions Two decisions are fundamental in planning international expansion: (1) which market/s should we address, and (2) which retail model should we use to address it/them? These questions are interrelated because the attractiveness of a market depends in part on the model that is to be employed. So, Germany may be a more attractive market for localised ecommerce than for store expansion owing to the intensity of established store retail competition. By contrast, the UAE today is rather more attractive for franchise stores than a localised ecommerce offer owing to the small scale of its ecommerce market. Figure 3: Risk/Reward matrix of different international development models

HIGH RISK/REWARD

Stores

eCom/MCR Multi-channel

Own store chain

(Best suited to fully owned or JV)

Own flagship Joint venture Franchise

Concessions Distributor rights

Fully localised ecommerce Un-localised ecommerce

LOW RISK/REWARD An ecommerce-only approach offers the cheapest and lowest risk entry, but some retailers have struggled to generate good website traffic in new markets because of low brand awareness. Often, such retailers inadvertently find themselves limited to serving expatriates in these markets rather than the wider population. A chain of stores or a flagship store is, in general, more effective than a website at introducing a new brand or offer to the market, although the cost of entry and risk of failure are greater. However, pure players like ASOS.com, which last year generated nearly 60% of its £495m sales from international operations (up 103% on 2010/11), and Amazon of course demonstrate that it is possible to build a sizeable business via the online channel alone. The opportunity for many now is to develop multi-channel operations in new markets, in which a relatively small number of stores can build awareness and support/be supported by a localised ecommerce operation. But, while there are some examples of retailers presenting their offer in new markets both online and in stores, almost no examples yet exist of a seamless multi-channel approach to international retailing. This will be seen in the coming phase of international expansion.

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Criteria for Market Selection The choice of approach and assessment of market attractiveness are dependent upon a multitude of factors related to, on the one hand, the size of opportunity and, on the other, the ease/cost of entry. The matrix below (Figure 4) summarises the most important considerations in determining a market’s attractiveness for a retailer considering entry via stores. Figure 4: Main criteria for selecting markets for development with stores

Assessment matrix for stores Big

Size of opportunity

• Large cities with rising affluent population • Weak local competition • Aligned to UK culture, norms & appetites

• • • • • • •

Open to direct investment Easy to do business/low corruption Good legislative environment Access to suitable store sites Good management & staff availability Suitable local logistics Strong local franchise partners

Small Hard

Ease of entry

Easy

Essential factors for a store-based entry include the level of openness to direct investment, levels of corruption and local laws. India, for example, has great potential but careful guidance is needed to navigate not only the country-wide laws but also the many local laws and taxes that can be a surprise to those who have not carried out appropriate research. The criteria in this matrix are typically more abundant in developing rather than developed markets, which explains why Central/Eastern Europe, Middle East, India, China and the Far East are seen primarily as store-led opportunities.

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Figure 5: Opportunities for UK retailers entering with stores in 2012

Large

2

CHN Relative size of opportunity

Later stage strategic priorities

IND BRA

RUS USA

1

JAP THA TUR Early entry opportunities DEU (often via turnkey KOR franchise partners) FRA UKR TWN ITA MYS SAU POL Highly ESP CAN AUS competed NLD UAE mature SWE markets DNK AUT

EGY*

Developed Small

IDN

Developing Hard

Easy

Relative ease of entry

* EGY hard due to current civil unrest

International store opportunities (see Figure 5 above), can largely be split into two groups: (1) markets that have well established franchise partners who can provide a ‘turnkey’ solution, resulting in a relatively smooth learning curve for retailers and (2) larger, more strategic priorities (e.g. China, India, Brazil) which retailers are now increasingly focussing on, often having built up their confidence through ‘turnkey’ opportunities. Developed markets, although significant in size, are highly competed, which reduces ease of entry and relative attractiveness. A different set of factors again are required to consider a market’s suitability for entry with localised ecommerce, as shown below in Figure 6. Figure 6: Main criteria for selecting markets for development with localised ecommerce

Assessment matrix for localised ecommerce Big

Size of opportunity

• Large market/strong growth • High ecommerce penetration/growth • Aligned to UK culture, norms & appetites

• • • • • • • •

Small Hard

Limited local competition Manageable payment methods Low fraud rates One local language (vs. multiple) Benign duty regime Low international shipping costs Suitable local logistics Acceptable product return rates

Ease of entry

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Easy

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The standard model suggests that large ecommerce market scale is the most important criterion in choosing where to localise ecommerce. This makes sense given that, all other things being equal, the fixed and capex costs of localising for a small market are often broadly similar to those of a large market – while the rewards from a large market are much greater. This explains why the USA and northwest Europe (especially Germany and France) have been the most popular markets in which to present localised ecommerce offers from the UK - as Figure 7a (below) illustrates. However, some markets like Australia, although not as large, are attractive as they offer less strongly competed markets and make ease of entry and brand building somewhat easier than more mature ecommerce markets like the USA. Figure 7a: Opportunities for UK retailers entering with localised ecommerce in 2012

2

1 USA

Large

Secondary opportunities

JAP

Relative size of opportunity

CHN

FRA DEU

KOR BRA RUS CAN TWN Developed

Small

Easy early entry opportunities

Developing Hard

IDN

IND UKR THA MYS

TUR SAU UAE EGY

Relative ease of entry

NLD ITA POL SWE DNK AUT ESP

AUS

Easy

Clearly, therefore, retailers’ preferred international markets for stores (developing countries) are not the same as for ecommerce (developed countries). Consequently, there are relatively few examples of integrated “multi-channel” approaches outside these retailers’ domestic territories.

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Looking at Figure 7b, it is clear that because of their high growth rates online, China (especially), and Brazil, Russia and South Korea will increasingly be on UK retailers’ radar screens for localised ecommerce. Some analysts estimate that by 2020 China will be the world’s largest ecommerce market, capturing up to 25% of global ecommerce sales. Given that some international retailers are already expanding into these markets with stores, it may not be long before we see the emergence of integrated multi-channel models there. Figure 7b: Opportunities for UK retailers entering with localised ecommerce in 2020

3

2 USA

Large

CHN Later stage

Relative size of opportunity

strategic opportunities

Secondary opportunities

JAP

Easy early entry opportunities

DEU FRA

KOR BRA RUS

IND

Developed Small

1

Developing Hard

TWN UKR THA MYS

IDN

CAN TUR

AUS

SAU UAE EGY

Relative ease of entry

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POL ITA NLD ESP DNK SWE AUT

Easy

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The Multi-Channel Opportunity The significance of the analysis shown above is most evident when synthesised into a single chart. Here we see the relative attractiveness for a typical UK retailer with international ambitions, of combining stores and ecommerce in selected major national markets, demonstrating where a multi-channel approach is likely to work best. Figure 8: Opportunities for UK retailers entering with stores, ecommerce, or both in 2020

Best for ecommerce alone

Best for multi-channel

More attractive

BRA RUS

AUS

POL

ITA CAN ESP

NLD DNK SWE AUT

2 TUR

TWN UKR UAE

MYS SAU

IND

Best for stores alone

eCommerce

CHN

Leading strategic multi-channel opportunities

JAP DEU FRA KOR

Less attractive

1

USA

Second fast growing wave

THA Developed

EGY

Less attractive

IDN

Developing More attractive

Stores

We expect multi-channel to become the preferred model among retailers expanding internationally, especially for the development of countries such as China, Russia, Brazil and Korea. There is also a fast growing second wave of emerging markets that includes India, Turkey Ukraine and Taiwan. These are the markets offering the best opportunities.

Javelin Group | 200 Aldersgate Street, London EC1A 4HD | +44 (0)20 7961 3200 | www.javelingroup.com

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Javelin Group played a key role in helping re-define our expansion strategy for emerging markets. The team delivered focused strategic insight and practical recommendations in a collaborative and personal manner. Richard O’Rourke Senior Vice President, International Timberland

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About Javelin Group Javelin Group is Europe’s leading specialist retail and ecommerce consultancy with a team of 140+ professionals based in London and Paris, working with many of the region’s largest retailers and distributors. Clients include most of the UK’s top 20 retailers and many large players across Europe. Our services include: 1 2 3 4 5 6 7 8

Retail strategy eCommerce and multi-channel retail planning and execution International expansion Acquisition screening and commercial and operational due diligence in the retail sector Location planning Shopping centre strategies (for developers and investors) Retail and ecommerce technology planning eCommerce website and mobile commerce development and systems integration

Javelin Group’s International Practice Javelin Group develops and implements international retail store, ecommerce and multi-channel expansion plans which include: retail market planning, retail market entry strategies, retail offer development and retail operational planning. We deliver practical and achievable international retail expansion strategies and operational plans, across all retail channels, with appropriate implementation support. Our approach typically supports three phases of international retail expansion: 1 Advance planning for international retail For each country, we assist executive teams with appropriate research and retail market testing:

  

Compare retail markets to assess where the best opportunities lie, based on the ‘accessible’ size of the opportunity and the relative ease of entry, brand synergy with local consumers and potential competitive strength. Local, legal and technological barriers/costs that may impact imports, retail store development and leasing. Are these barriers prohibitive to running a successful operation? Detailed market entry studies and retail audits of prioritised countries. Key shopping venues for synergetic brands, market positioning and pricing structure/approach of key competitors.

2 Implementation of international retail plan We support the management team with implementation solutions:

    

Appropriate multi-channel retail mix (store, ecommerce, catalogue) Operating model (concession, franchise, joint venture, outright ownership) and identification of appropriate partners Prioritise geographic retail store roll-out to ensure the right stores open in the best venues Supply chain planning Organisational structure planning

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

Ongoing support throughout the implementation process

3 Optimising growth and profitability of international retail

 

Fff0

Longer term business planning in new territories to ensure economies of scale and optimised profitability are achieved Identifying local hubs to grow the business into surrounding territories to ensure the international network is optimised

For a discussion about the implications for your business of the findings in this White Paper, please contact: Richard F Wolff Director, Javelin Group +44 (0)20 7961 3216 [email protected] Alex Evered Manager, Javelin Group +44 (0)20 7961 3242 [email protected]

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Appendix 1: Building a Balanced Scorecard The best approach to prioritising markets, along the lines suggested in this White Paper, is to develop a well-structured scorecard with the relevant criteria appropriately weighted. The scorecard below illustrates the criteria used in a recent Javelin Group engagement to assess the potential of markets for a store-based approach. Figure 9: Typical scorecard for market entry with stores Weight

DEU

USA

POL

UAE

IND

CHN

Open to direct investment

Y/N











_

Weak local competition

25%

1.00

1.00

3.50

4.00

4.00

4.50

Aligned culture/appetites

15%

3.00

4.00

4.00

3.00

1.50

1.00

Easy to do business

15%

5.00

4.00

3.00

3.50

2.00

1.50

Favourable tax & duties

10%

5.00

3.00

5.00

4.00

3.00

3.00

Access to suitable sites

13%

1.50

2.00

3.50

3.50

3.00

3.00

Good mgm’nt available

10%

5.00

5.00

4.00

3.50

2.50

1.50

Large addressable mkt

7%

3.50

5.00

2.00

1.50

2.00

2.00

Suitable local logistics

5%

5.00

5.00

3.50

3.00

2.00

2.00

100%

3.14

3.11

3.60

3.44

2.71

2.58

Stores - 2012

Score

Each criterion is scored out of 5.0 (where 5.0 = best), and each is weighted to account for its relative importance. Some criteria like “Large addressable market” may themselves be made up of multiple sub-criteria developed in subsidiary scorecards (see Figure 10). There is a myriad of information available to help inform these scores (population, GDP, affluence, corruption ratings, market size by category, retailer presence, socio-economic datasets...) and one dataset alone is rarely sufficient to score any given criterion. For example, a large population may suggest a large market in value terms but when analysed on a per-capita basis it may become clear that the population is too poor for the brand in question. India has over 1 billion people but only a fraction of that population can readily afford high-end fashion brands. Datasets must therefore be used collectively and assessed intelligently to layer up the evidence and remove reliance on too few variables which may generate a distorted result. Figure 10: Multiple data inputs for assessing criteria scores (illustrative)

DATA INPUTS

TRIBUTARY CRITERIA

Population, geo-demo bands GDP, GDP per capita Households with TVs Households with cell phones Households with Internet

Large, affluent middle class

% of pop’n living in cities Number of cities of 1M+ Avg. income of city dwellers

Market is accessible via stores

Category market size ($m) Presence of similar brands

Large upscale category market

MAIN CRITERION

Large addressable market within reach of stores

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Separate scorecards – albeit with some common criteria – are required to assess the market opportunities for stores and ecommerce. And indeed, it may be necessary to develop different scorecards (again, with different criteria) when considering other store-based business models (e.g. rolling out a chain of stores operated by a franchise partner, opening a limited number of wholly-owned flagship stores in the major cities). In fast-changing, fast-growing markets it is sensible to look forward and consider each criterion both as it is today and as it will be in the future. For example, the attractiveness of China in the near future as a market for ecommerce may be missed if the scorecard considers only the relatively modest size of its ecommerce market today.

Appendix 2: Tailoring the Offer and Business Model Beyond selecting the best markets for stores, ecommerce and multi-channel, it is also critical to tailor the offer to local tastes, festivals, and seasonality, and to price the offer to ensure competitiveness: Example 1: In Muslim countries the major festival of Eid, which generates a significant uplift in sales of gifts, gourmet foods and childrenswear, moves forward by 10 days every year: planning this important date into the buying and merchandising calendar is essential to ensure that retailers are able to serve their consumers in these markets. Example 2: When Marks & Spencer investigated the Indian market prior to its entry with a partner a few years ago, it became apparent that, while many women wear traditional saris and therefore were unlikely to buy many of M&S’s womenswear lines, most men wear collared shirts (in preference to t-shirts and other tops) on most occasions. In consequence, M&S successfully skewed its Indian product mix heavily in favour of collared shirts and more formal menswear at lower price points to make it appealing to that part of the population. The business model / partnership agreement can be tailored in many ways to suit a given market. If the business model selected does not need an official partner, who should the business employ to assist in the “local corridors of power”? If a partner is required, selecting the right one will be a key decision in itself requiring due diligence on their previous performance in regards to realising the potential of other brands. A number of other operating decisions must be made: the capital model for stores, revenue model, mark-up, volume agreements, minimum order sizes, range options, returns, markdowns, whether to set up a local office, how to configure and structure the supply chain, merchandising support, level of brand support, marketing and brand registration. Having a good balance of local and expatriate management is important. Too many expatriates will discourage local employees and are very expensive in comparison to local management. However, there needs to be sufficient domestic HQ support to help people understand the brand.

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Appendix 3: Key UK Retailers’ Approach to the UAE and BRIC In this section, we look at the approach of some leading UK retailers: Arcadia, Body Shop, Debenhams, Mothercare and M&S in the much publicised UAE and BRIC markets. In some cases, these retailers are yet to enter, indicating that the country is not a priority, despite the potential these markets are said to offer. For each market and each retailer (as of May 2012) we have looked at the extent to which they have localised their ecommerce offer and the number of stores they have in these markets.

UAE Country: UAE Stores Current Stores

Arcadia

Body Shop

Debenhams

Mothercare

M&S

38

26

7

32

10

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ecommerce Local Transactional Website Local Marketing Site Delivery From Offshore Site

The UAE offers a small but relatively straightforward store development opportunity for retailers. This is due to the presence of many good franchise partners in the region and modern shopping malls, low taxes, with the opportunity to import through the Jebel Ali duty free zone. Corruption is very low and recruiting is generally easy. These have all made the UAE an easy opportunity in which retailers can build confidence in their international capabilities These facts still remain, though the country has a small population which downgrades it somewhat compared to larger markets - in terms of the quantum of store-led opportunities. Our selected UK retailers all have significant store presence in the UAE, but are yet to exploit the ecommerce opportunity fully. This is likely to change rapidly with a relatively young population who are well educated, affluent, and becoming increasingly empowered. The UAE leads the way in the GCC for ecommerce spending, with sales close to £1.3bn, according to a new study by Visa. Euromonitor suggests that ecommerce growth in the UAE is progressing exponentially, and according to the media agency Omnicom Media Group (OMG), 49% of UAE internet users have already made purchases online. While UAE consumers may be using ecommerce sites more, these are mainly global sites such as Amazon.com, rather than local players. Some historical barriers to-date have included consumers’ reluctance to use credit cards and an unclear postaladdress system. However, as with store development the small population will limit the size of the opportunity. Within the UAE there are subtle market differences between the emirates, with Dubai currently being the main retail territory, although Abu Dhabi has begun to challenge Dubai as a shopping destination. The local market benefits from three key customer groups: locals, working expats and tourists. Retailers with limited experience of the market are often caught out by Eid’s transience each year. This is a major gift buying peak.

Javelin Group | 200 Aldersgate Street, London EC1A 4HD | +44 (0)20 7961 3200 | www.javelingroup.com

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Brazil Country: Brazil Stores Current Stores

Arcadia

Body Shop

Debenhams

Mothercare

M&S

0*

0

0*

0*

0

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ecommerce Local Transactional Website Local Marketing Site Delivery From Offshore Site *Opening stores soon

Brazil offers a strong multi-channel opportunity. However, so far UK retailers have largely ignored this opportunity. Until recently, Brazil was considered an unstable market. Its punitive import duties on footwear and apparel, especially in regards to Chinese imports, limited its attractiveness as a retail market. Operational complications, such as the requirement for imports to arrive directly from the country of origin, with no en-route warehousing, further limited its attractiveness. Apparel is also subject to numerous bureaucratic requirements such as Brazil-specific labelling that is frequently subject to change. It has therefore been difficult to run a competitive footwear or apparel business without local manufacturing. This often demands a critical mass of stores from the outset to satisfy local minimum factory orders, requiring significant initial investment - even with a local partner. As a result, UK retailers have been slow to take up the opportunity presented by Brazil, although the strong Real is now rendering imports cheaper in comparison to local manufacturing. Spanish brands (Mango, Zara) are so far among the few global brands to develop strong networks in Brazil, as have C&A. Recent reports suggest that Mothercare and Arcadia are seeking to develop store networks imminently in Brazil. Currently the Brazilian ecommerce market is relatively small (£6.6bn in 2011), but growing quickly, 16% CAGR 2006-11. Broadband uptake is increasing. This phenomenon, alongside the rise of the Brazilian middle class, will continue to drive uptake. Confidence around payment security is a key consumer concern, so some retailers offer “boleto bancario”, a small slip that customers may print out and pay at a bank. Logistics infrastructure is problematic in Brazil (beyond Rio de Janeiro and Sao Paulo) and is a significant barrier to the future success of the ecommerce market.

Russia Country: Russia Stores Current Stores

Arcadia

Body Shop

Debenhams

Mothercare

51

19

0

46

31

M&S

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ecommerce Local Transactional Website Local Marketing Site Delivery From Offshore Site

Russia also offers a strong multi-channel opportunity.

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Bureaucracy is a key issue, rendering very thorough pre-planning an absolute necessity. UK retailers currently focus almost exclusively on Moscow and St Petersburg, and business levels can be very disappointing in secondary cities where fewer people may be aware of international brands and/or may not have the disposable income to support them. Recruiting an appropriate partner must be undertaken carefully. Staff recruitment is difficult and finding affordable retail locations is a major challenge. Experienced retailers often mention corruption, but changing local laws and import rules can present a greater difficulty. There is also a significant grey market that retailers and brands must learn to navigate. Harsh winters can catch out new apparel brands who offer products (e.g. footwear) that are not fit for purpose! The Russian ecommerce market is estimated to be £5.6bn for 2011. A number of domestic storebased retailers are developing in the online space as a result of high rents for good quality retail space, particularly in central Moscow. This growth has also been supported by significant improvements to broadband offers in terms of speed and affordability. Legislation passed in 2007 to govern the use of personal details on the internet has improved trust levels. The majority of internet purchasers are based around St. Petersburg and Moscow, and logistics networks beyond these centres are generally poor. Russians remain wary of online payment methods, due to fraud, and as a result many retailers offer a cash on delivery service.

India Country: India Stores Current Stores

Arcadia

Body Shop

Debenhams

Mothercare

M&S

0

78

3

35

24

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ecommerce Local Transactional Website Local Marketing Site Delivery From Offshore Site

*English is seen as local language in internet terms

India is a challenging market. However, it should be viewed as a significant long term store-led investment opportunity. Challenges arise from India’s strict foreign direct investment rules, which can greatly limit the activities of foreign retailers. Infrastructure is poor and transportation of goods can be challenging. Most product travels by road and as a result of the weak infrastructure, stock losses are common. Per-capita income levels are growing quickly, though from a very impoverished base. World-class retail environments are also limited, and good quality retail sites are very expensive. Corruption at all levels is high, rendering the business environment difficult to navigate. A strong heritage in traditional dress can weaken the potential for sales of apparel in the Indian market. At present there is limited opportunity beyond a few key metropolitan centres, such as Delhi, Mumbai, and Bangalore. Recruitment is difficult due to the lack of organised retail, and employees will move on quickly if a new, more prestigious brand appears with an offer of employment. The complexity of opening in India, and the likely level of investment will demand closer attention from a management team, compared to other territories. Picking the right partner is always critical. In this market, a partner with good connections to local power bases is very important. India has a very small ecommerce market (£600m in 2011), analysts predict that the Indian market will take off more aggressively via mcommerce.

Javelin Group | 200 Aldersgate Street, London EC1A 4HD | +44 (0)20 7961 3200 | www.javelingroup.com

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Russia and China are important countries to be in, but one needs to be patient and get pre-opening planning especially in regards to supply chain, logistics and compliance ‘spot on’. Jerry Cull International Director Mothercare

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China Country: China (Excl H.K. & Taiwan) Stores Current Stores

Arcadia

Body Shop

Debenhams

Mothercare

0

0

0

18

7

M&S

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ecommerce Local Transactional Website Local Marketing Site Delivery From Offshore Site

China is a key multi-channel opportunity. It is not the easiest market to enter and as a result some retailers have found it helpful to open in Hong Kong first. The Chinese market requires patience. Several US and UK retailers have discovered that they can quickly profit with top-end brands, but middle market brands can take much longer to establish themselves. Recruitment is very competitive due to the number of companies looking for experienced employees. Companies do not necessarily need a local partner but do need local relationships to help them through the corridors of power and local rules, and recruiting an appropriate general manager is crucial. Brands are finding that some Chinese consumers are not keen on buying product made in China! China has a fast-growing ecommerce market, currently valued at £14.2bn. Taobao is the key selling platform, with many international retailers, such as Uniqlo, entering the market via Taobao Mall. Luxury retailers such as Yoox and Burberry have been among the international forerunners in exploiting the potential of the Chinese B2C ecommerce market. Logistics networks outside urban areas remain sub-optimal, although urban populations are so high that restricted infrastructure beyond these areas should not impact too negatively on the huge potential of this market. Non-domestic retailers must, however, pay heed to the Chinese government’s censorship of websites; Google no longer operates a .cn site (instead redirecting via its Hong Kong pages), and Facebook cannot be accessed from the mainland unless a re-direct proxy is used.

Javelin Group | 200 Aldersgate Street, London EC1A 4HD | +44 (0)20 7961 3200 | www.javelingroup.com