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International Retail New channels and new frontiers JAVELIN GROUP WHITE PAPER

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

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

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 .......................................................................... 15

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 ........... 19

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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 multi-

channel 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.

4



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 multi-

channel opportunities including: India, Turkey, Ukraine and Taiwan.

Figure 1: Opportunities for UK retailers entering with stores, ecommerce, or both in 2020

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.

Developing

Developed

USA

FRADEU

ESP

ITA

AUS

SWEDNK

POL

AUT

NLD

THA

IDN

IND

BRA

UKRTWN

KOR

JAP

RUS

MYS

CAN

TUR

UAEEGY

SAU

CHN

eC

om

me

rce

Stores

Moreattractive

Lessattractive

Less attractive More attractive

Best for multi-channel

Best for ecommerce alone

Be

st f

or

sto

res

alo

ne

Leading

strategic

multi-channel

opportunities

Second fast

growing

wave

1

2

mailto:[email protected]

6



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)

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.

102

81

71

43

42

40

38

34

26

25

24

18

15

13 13

6 6

5

3 3

2

1 - -

Stores eCom Stores eCom Stores eCom Stores eCom Stores eCom Stores eCom Stores eCom Stores eCom Stores eCom Stores eCom Stores eCom Stores eCom

Mango Zara Esprit NextM & SH&M Tesco ASOSBootsC&AArcadia Debenhams

Number ofcountries

Source: Javelin Group analysis

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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.

9



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

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.

Distributor rights

Concessions

Franchise

Joint venture

Own flagship

Own store chain

Un-localised ecommerce

Fully localised ecommerce

HIGH RISK/REWARD

LOW RISK/REWARD

Stores eCom/MCR

Multi-channel (Best suited to fully

owned or JV)

10



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

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.

Size

of

op

po

rtu

nit

y

Ease of entry

Big

Small

Hard Easy

• 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

Assessment matrix for stores

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

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

Ease of entry

Big

Small

Hard Easy

• Large market/strong growth

• High ecommerce penetration/growth

• Aligned to UK culture, norms & appetites

• 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

Assessment matrix for localised ecommerce

Size

of

op

po

rtu

nit

yR

ela

tive

siz

e o

f o

pp

ort

un

ity

Relative ease of entry

IND

BRAUSA

JAP

FRADEU

ESPITATWN

KOR

SWEDNK

CAN

AUT

NLD

Developing

Developed

Large

Small

Hard Easy

Later stage

strategic

priorities

CHN

THA

IDN

UKR

MYSAUS

TUR

RUS

UAE

SAU

Early entry opportunities

(often via turnkey

franchise partners)

Highly -

competed

mature

markets

1

2

EGY*

POL

* EGY hard due to current civil unrest

12



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

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.


USA

FRADEU

ESP

ITA AUS

SWEDNK

POL

AUT

NLD

Developing

Developed

Large

Small

Hard Easy

Easy

early entry

opportunities

CHN

THAIDN

IND

BRA

UKR

TWN

KOR

JAP

RUS

MYS

CAN

TUR

UAEEGY

SAU

Secondary

opportunities

12

Re

lati

ve s

ize

of

op

po

rtu

nit

y

13



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


USA

FRADEU

ESP

ITAAUS

SWEDNK

POL

AUT

NLD

Developing

Developed

Large

Small

Hard Easy

Easy

early entry

opportunities

CHN

THAIDN

IND

BRA

UKRTWN

KOR

JAP

RUS

MYS

CAN

TUR

UAEEGY

SAU

Later stage

strategic

opportunities

Secondary

opportunities

123R

ela

tive

siz

e o

f o

pp

ort

un

ity

14



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

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.

Developing

Developed

USA

FRADEU

ESP

ITA

AUS

SWEDNK

POL

AUT

NLD

THA

IDN

IND

BRA

UKRTWN

KOR

JAP

RUS

MYS

CAN

TUR

UAEEGY

SAU

CHN

eC

om

me

rce

Stores

Moreattractive

Lessattractive

Less attractive More attractive

Best for multi-channel

Best for ecommerce alone

Be

st f

or

sto

res

alo

ne

Leading

strategic

multi-channel

opportunities

Second fast

growing

wave

1

2

15



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

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 Retail strategy

2 eCommerce and multi-channel retail planning and execution

3 International expansion

4 Acquisition screening and commercial and operational due diligence in the retail sector

5 Location planning

6 Shopping centre strategies (for developers and investors)

7 Retail and ecommerce technology planning

8 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

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

Fff0

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]

17



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

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)

Stores - 2012 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

Score 100% 3.14 3.11 3.60 3.44 2.71 2.58

Large addressable market within reach of stores

Large, affluent middle class

Market is accessible via stores

Population, geo-demo bandsGDP, GDP per capitaHouseholds with TVsHouseholds with cell phonesHouseholds with Internet

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

Category market size ($m)Presence of similar brands

DATA INPUTS TRIBUTARY CRITERIA MAIN CRITERION

Large upscale category market

18



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.

19



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 Arcadia Body Shop Debenhams Mothercare M&S

Current Stores 38 26 7 32 10

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 postal-

address 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.

20



Brazil

Country: Brazil Stores Arcadia Body Shop Debenhams Mothercare M&S

Current Stores 0* 0 0* 0* 0

ecommerce




*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



ecommerce




Russia also offers a strong multi-channel opportunity.

21



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 store-

based 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



ecommerce




*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.

22



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

China

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



ecommerce




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.

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