The Secret to a Successful International Expansion
We all know about Target, which lost $2 Billion over two years on Canadian soil. Many giants, leaders in their sector, have failed despite their size, resources, and their strategy.
The most recent one to get a taste of this failure is Starbucks. The Seattle-based company, which is attempting a bold gamble in Italy, has just pulled the plug on a 20-year partnership with Restaurant Brands New Zealand (which manages the KFC and Pizza Hut banners in that country). The giant had to wash its hands after years of losses, because Kiwis love their national brands, including Mojo and Fuel, reports Reuters. Starbucks closed half of its coffee shops in Australia a decade ago (a US $143 million loss), as it was unable to compete with local cafes founded by Italian immigrants after the war.
All over the world, multinationals often get bumped out of micro-markets in which craft cafés reign supreme, as evidenced by Starbucks recent departure from rue St. Denis Street on Mont-Royal Plateau in Montreal. In Israel, Starbucks threw in the towel in 2003 after two years of effort. Its products were considered bland compared to the very strong Turkish coffees served locally.
Another case in point: Walmart. Yes, Walmart. The world’s leading retailer failed after opening 88 stores in Germany in 1988, only to close in 2006 at a loss of $1 billion USD. Why? It faced fierce competition from popular German brands Schwarz, Metro, Edeka and Aldi (which, ironically, has 1660 US stores that are doing very well), consumer are loyal to German companies, Walmart’s ignorance of the country’s labour laws and clerks that were considered…too “warm” and too “indoctrinated”!
Walmart also left South Korea that same year, after having opened 16 stores in 1988. The presentation of fresh products, especially fish, and the excessive height of the shelves were blamed.
Also in Asia, French food giant Carrefour (number two retailer in the world) closed its 31 Thailand-based stores in 2010, even though this country was already part of Indochina. What did Carrefour miss? In 2012, the company sold its Malaysian stores to giant Aeon. Even more humiliating, four months after opening two Russian hypermarkets, Carrefour locked up and closed its doors.
The Le Monde newspaper explained that the failed negotiations to acquire a local chain precipitated the strange decision. Its two American stores, dishonourably closed in 1994. Its British competitor Tesco didn’t have any better luck in the United States: Tesco sold its 150 Fresh & Easy stores to Yucaipa investment funds in 2013, after having lost $1.2 Billion USD. Tesco blamed the 2007 recession. But CBS believes that the concept (bringing prepared foods to the supermarket, like in Europe) was not trendy.
Best Buy lost $318 Million USD in the United Kingdom in 2011, one year after having opened 11 stores. It also crashed in China, closing its 11 stores in 2011 after just five years of business. Most Chinese consumers were accustomed to negotiating their prices in small shops and had the impression of paying too much at Best Buy, explained CNBC. But local banners, like Gome, Jiadeli and Lianhua, also made life difficult for it. Home Depot also left China in 2011 after losing $160 Million USD: the Chinese, who are not do-it-yourselfers, turned away from its 12 stores.
Also in China, eBay has never been able to beat TaoBao or Alibaba. Even Google had to leave because of censorship. McDonald’s, which earns two-thirds of its revenue outside the United States, experienced some failures, including Jamaica and Bolivia. In that country, people prefer buying hamburgers prepared on the roadside by thousands of cooks at one-third of McDonald’s prices.
CANADA’S NOT SO EASY
Clothing retailer Marks & Spencer had up to 50 stores in Canada until 1999. But in 26 years, the company has never really appealed to Canadian consumers…
Sears Canada’s bankruptcy precipitated the closure its last 196 stores in January. The chain had an undeniable advantage over its competitors in this era of online: an incredible network of depots in hundreds of cities and towns. The chain, operating in the country since 1953, was unable to adapt to the new realities of the industry, including not doing enough with its super-popular catalogue, reported the CBC.
Lastly, Quebec’s Jean Coutu sold its 2200 Brooks, City Drug, Osco Drug and Eckerd pharmacies in exchange for 32% of the shares of its competitor Rite Aid in 2007. In 2013, it sold its last shares of Rite Aid, nearly 20 years after beginning its American adventure at a cost of more than $2 billion CDN.
KNOW YOUR TARGET MARKET
Several reasons explain such failures. Firstly, there is often overconfidence, otherwise known as “arrogance”. Leaders are convinced of their superiority, or believe that they understand the target country’s culture. They believe that what is sold at home will certainly be popular abroad. But it obviously does not work that way – you have to work hard to best understand your target market and local customers.
How? By analyzing its peculiarities through field research, by better understanding its consumers’ culture, tastes and buying habits, by hiring experts and carefully analyzing the competition. We need more polls (like POTLOC’s), focus groups and, in a sense, probe commercial democracy.
Maximize opportunities to decentralize: Hire the best local leaders who speak the customers’ language, tighten up contacts with politicians, engage with customers, anticipated adjusting supply quickly to meet the demand to offer the right products in the right places.
Some recipes for success are applicable everywhere. Do not choose bad locations (location, location, location!), strive to offer unbeatable prices because the consumer always wants to pay less than elsewhere, never launch during an economic crisis affecting the local economy (consumer confidence is at its lowest), never underestimate the costs of expansion, especially those related to local taxes, workforce training or to a scarcely-known foreign bureaucracy.
While some want to venture out on their own, others prefer to partner with a local partner. This is a particularly delicate operation: you have to bet on the right horse. Others buy a local competitor outright; one that hopefully is not in decline, so as to avoid inheriting a losing culture.
Lastly, some companies want to grow for the wrong reasons, especially if the domestic market has poor growth prospects, and they neglect to reinvent themselves, or simply to maximize business opportunities close to home. In the end, we have seen senior leaders underestimate the effort required for international expansion: it takes a lot of time, energy, organization and money.
By Stéphane Desjardins