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Same brands, different space

If you are an international retail brand fan or just love shopping when you are travelling you probably have many stories of your favourite stores overseas and what wonderful experiences you’ve had in them. The first time you visited the Prada store in SoHo New York. Your shopping sojourn to the annual Selfridges May promotion in London. Build-a-Bear in San Francisco or Louis Vuitton’s new flagship store on the Champs Elysee in Paris.

You’ll no doubt also have a view about the way international brands are represented in the domestic marketplace – for many a jaded view. After all, it isn’t just a perception that the brand experience delivered here does not match the magnetism, engagement and overwhelming “WOW factor” delivered by the parent brand in their key markets of the U.K., U.S.A. and Europe – it’s a fact.

Perhaps we should say “thank heaven’s for small mercies” – that these stores and their products are available in a country with the total population of a large international city. But that doesn’t wash really does it. In fairness however, there are some critical cost drivers which affect the way these retail brands end up going to market here.

While sales in local currency per store are pretty much equal to sales per store in overseas currency numerically (differing only with the $ sign or pound sign in front of them), there are five key input costs affecting go to market here are:

  1. Occupancy costs are higher – ranging from 11% to 21% (averaging 15%), the ratio is relatively universal however, you get a lot more m2 for your 15% in the USA, Europe and the U.K.
  2. Wage costs are higher – notably in comparison to the U.S.A. where basic wage to sales ratio’s are far lower per FTE meaning both the number of people on the shop floor is higher and the total staff overhead is lower.
  3. Cost Of Doing Business (CODB) is higher – store operating costs as a percent of sales are higher.
  4. Dollar margins are lower – after international licensing fees/Cost Of Goods (COGs) the average finished margins once the goods have exited the system are lower compounded by the US$ /UK pound effect.
  5. Store networks are small – which means there is no scale in terms of amortisation of capital, overhead and CODB, as well as the aggregated profit opportunity.

The result – smaller stores, less staff, less spend on fit-out and in-store experience, less spent on local promotion and few (if any) flagships as we see overseas.

For example, while it is fair to say that the Polo Ralph Lauren stores standards in Australia are market leading, I’d be surprised if we ever see the likes of the New York or Chicago flagship stores here.

Of the course the compounding factor to the “shopper let-down” is the northern hemisphere/southern hemisphere seasonal mis-alignment. For merchandise buyers this is a real issue as they can’t replenish or correct mistakes mid-season, so they err on the side of caution buying lower risk items in larger quantities to carry the season – knowing that they are committing to the items 18 months ahead of the go to market timeframe in one lump purchase. Makes perfect business sense, but it means a great deal of the edgy, riskier, more interesting product that turns the shoppers and the journalists on just doesn’t make it to the local shelves.

Is there a solution to this? After all we’ll never have the scale of overseas markets.

In operating an international license, master franchise or territory operation the first issue is realism in terms of the local market opportunity, store network size, store locations, input costs and the building of a sustainable brand franchise. These business opportunities are not licenses to print money and require as much diligence, discipline and passion to drive a reasonable return as any other form of retail.

Provided the returns horizon is not overly ambitious (read greed), a business plan can be put together which supports a limited number of full-line/full-size flagship stores, a different performance based remuneration system which lifts the FTE staff to m2 ratio, delivers fewer but larger footprint stores and supports greater investment in brand experience.

All of this will have an effect on productivity and return on investment through higher sales $ per store.

In addition – in the fast-fashion model – many international brands are also facilitating new methods of buying/supplying, which reduce risk and speed up the merchandise cycle from plan to sell-through enabling more flamboyant selection and greater risk reduction.

With an increasing number of international brands interested in coming to these shores competitive forces will ensure greater attention to what creates the brand opportunity, what supports the brand franchise and what drives it’s productivity.

With careful disciplines by the owner/operators of the licenses and franchises – and a realistic view of return – we could see international retail brand representation here just get better and better. And that would make a lot of shoppers happier and more inclined to spend their hard earned money.

Not to mention a few retail voyeur’s like myself.