What are all the risks associated with global expansion highlighted in the two articles below?
J. Crew Suits Up for Overseas
J. Crew Group Inc., once a skeptic of expanding overseas, is taking its suits and cashmere abroad. The New York-based company plans on opening stores in capital cities in Europe and Asia "soon," and beginning Thursday will start shipping online orders to 107 countries as a way of testing the market, says Chairman and Chief Executive Millard "Mickey" Drexler. The move marks a sea change for the brand and its CEO, who previously had called overseas expansion a "distraction" from domestic operations. Today, J. Crew has just one store outside of the U.S.—in Toronto. Over the past year, however, the success of U.S. competitors overseas and improvements to J. Crew's own product and sales have caused Mr. Drexler to change his opinion. "I'd always been hesitant, because I wanted to make sure it would give us the proper return on investment," Mr. Drexler said in an interview at his downtown New York office. "We still had too much to do in America with all of our businesses." J. Crew executives are currently in Asia and Europe scouting out retail space and negotiating rents, he said. Stores in Hong Kong and London will launch first and will take at least a year to open once the company finds a location. The 68-year-old CEO said he has also been traveling abroad, visiting competitors to evaluate pricing and quality. Mr. Drexler says tapping foreign markets, both online and through retail, will help spur growth. J. Crew's sales have increased in each of the past eight years, but the company still remains a relatively small player in terms of store count and revenue. In 2011, the retailer posted nearly $1.9 billion in revenue on a base of 266 retail stores and 96 outlets. Last March, Mr. Drexler took the company private with TPG Capital and Leonard Green & Partners LP. J. Crew's move overseas also comes amid tougher competition from foreign retailers expanding in the U.S. J. Crew CEO Mickey Drexler said executives are currently in Asia and Europe scouting out retail space. Last October, Fast Retailing Co. 's Uniqlo opened a 90,000-square-foot flagship store on Manhattan's Fifth Avenue as a kickoff to broader expansion in the U.S. Uniqlo currently has just three U.S. stores, but U.S. Chief Operating Officer Yasunobu Kyogoku says the chain ultimately plans to have "hundreds of stores" here. The chain expects the U.S. to be a $10 billion market by 2020, says U.S. CEO Shin Odake. Hennes & Mauritz AB's H&M opened its first U.S. store in 2000 and has more than 200 today in 30 states. Inditex Group's Zara has 47 U.S. stores. Expanding abroad doesn't mean J. Crew no longer sees room to grow in the U.S. Unlike competitors that have saturated the U.S. market and are now subsequently closing domestic stores and downsizing real estate, J. Crew has just 225 full-line stores and 32 Madewell stores. Mr. Drexler says J. Crew could easily have 300 U.S. stores, and Madewell is still growing. "We're not finished in America at all," he said. On Thursday, J. Crew will begin shipping to more than 100 countries, a move aimed at boosting online revenue but also at helping the company decide where demand would support physical stores. Before September, the chain had only shipped to the U.S., Canada and Japan. Mr. Drexler expects it will take time for J. Crew to develop a following in some countries, but has fielded requests from foreigners for the company to open stores in their countries for years. Nearly 30% of all customer comments the company receives are questions about when it will open up in other countries, and 10% of the traffic to its website is from outside of North America, the company says. Some of the countries J. Crew will ship to, like China and Brazil, are obvious choices because of their booming middle classes. Others, less so. Earlier this week Mr. Drexler, who likes to address employees on a personal loudspeaker that broadcasts throughout the company's New York headquarters, took to the device to quiz his employees about one of the new countries on J. Crew's shipping list. "Has anyone heard of a country in the world called Reunion?" he asked. Within seconds, his personal phone line was buzzing with employees explaining it is a French island in the Indian Ocean. After four phone calls, he closed the line and made a companywide announcement to give employees the answer. "I hadn't even heard of it," he admitted after hanging up. For now, Mr. Drexler is taking his time expanding. The former Gap Inc. CEO grew Gap too big, too quickly and it became a strain on the company's balance sheet.
Failed stores in Japan—where J. Crew once had 70 locations with a partner—have also left the company cautious. Mr. Drexler closed the stores in 2008 and now leans more toward controlling the company's stores abroad rather than using a partner as a result. "I think even today it's still somewhat of a distraction, but it's a long-term investment," he says.
Neiman Makes Web Push to Lure China Shoppers
Neiman Marcus Group Inc. plans to become the latest luxury name to dive into the Chinese market. But the splash it hopes to make will be online—an unusual move for a market where high-end shoppers favor brick-and-mortar buys over the click of a mouse.
The Dallas-based retailer is paying $28 million for a stake in Chinese fashion website Glamour Sales Holding Ltd., marking its first international foray. Neiman hopes the deal will help it roll out its own site to sell luxury clothing and accessories to Chinese shoppers by the end of the year, said Chief Executive Karen Katz in an interview. Neiman didn't disclose the size of the stake.
The move is an attempt to take advantage of the booming Chinese appetite for luxury goods, but without the risk and investment of opening physical stores.
"Anyone who sells luxury has to be looking at China today," Ms. Katz said, noting that Neiman hasn't yet decided if it will sell in China under its namesake brand or its Bergdorf Goodman brand.
U.S.-based luxury retailers like Neiman Marcus have benefited from the resurgence of spending among the wealthy, who have returned to shopping en masse amid the stock market rally. During its most recent quarter, Neiman posted $1.3 billion in revenue and said its profit rose 91% to $40 million.
China is poised to become the No. 1 luxury market overall by sales by 2020, with sales of $101 billion, according to estimates from brokerage CLSA Asia-Pacific Markets. In 2010, luxury spending in Greater China, including Hong Kong and Macau, ranked third globally after the U.S. and Japan, according to research by Bain & Co.
Sales of luxury fashion and accessories to Chinese buyers at home and abroad totaled about $40 billion last year, up 33% from the year before, according to consulting firm Boston Consulting Group, which calculated the estimate based on a survey of the top five luxury brands in China and 1,000 Chinese consumers. Louis Vuitton, Chanel and Gucci—all of which Neiman Marcus carries—were the top three desired luxury brands in China in 2011, according to Bain.
Meanwhile, Chinese e-commerce is also booming. Sales from all online shopping transactions, excluding business-to-business transactions, jumped to 770 billion yuan ($122 billion) in 2011, up 68% from a year earlier, according to market research firm iResearch.
Shipping to China allows Neiman to test international waters without much risk. Neiman won't have to enter real-estate contracts or grapple with local customs. Online sales tend to be higher margin than retail sales because of fewer overhead costs.
But, so far, China's luxury market and e-commerce have had little overlap. In 2011, China's online luxury sales accounted for just 3% of Chinese luxury sales, up from 1% a year earlier, according to Boston Consulting. That compares to 12% in the U.S., where overall luxury sales totaled roughly $45 billion last year.
"Luxury purchases need to become more everyday before online can take off," said Vincent Lui, a Hong Kong-based partner at Boston Consulting.
Chinese luxury shoppers prefer to buy in stores, where they can learn about the products, feel them and then flaunt them as they walk out of store, said Ben Cavender, a senior analyst at China Market Research Group. Chinese shoppers are also fearful that the products sold online are more likely to be fakes, said Mr. Cavender.
Ms. Katz said she believes that will change. Neiman launched e-commerce in the U.S. in 1999, when few were buying, she said.
Analysts say that another challenge luxury brands face online in China is selling at full price. Most consumers head to the Web for sales and Glamour Sales itself has amassed a loyal consumer base in China, where it rolled out in 2010, with flash sales of discounted goods. Neiman will sell its goods at full price on the site, Ms. Katz said.
Under Ms. Katz's leadership, the department store, which opened its first door in 1907, has worked to become more accessible and target new shoppers at the entry level of affluence. Entering China now could help further her goal by capturing more newly affluent consumers who can grow with the company.
The Neiman's and Bergdorf Goodman names aren't well known in China, but Ms. Katz said the company will aim to educate consumers through online and event marketing.
Neiman will also give Chinese consumers access to exclusive content, including behind-the-scenes videos with industry experts and insiders, Ms. Katz said.
Rival Milan-based Yoox YOOX.MI +0.66% SpA, the first foreign company to launch luxury sales online in China in 2010, attaches radio-frequency tags on products to track the delivery and ensure that the real goods don't get swapped for fakes en route. It also sends goods with a shopping bag of the brand and a reusable, durable gift box made of sturdy cardboard with a magnetic clasp in which the customer can display the goods.
Competition for the small number of online Chinese buyers is also mounting. Earlier this month, U.K. online luxury retailer Net-a-Porter, which sells brands such as Alexander McQueen and Jimmy Choo, launched in China. Many Chinese homegrown sites, such as Wooha and ihaveu.com, have also started popping up over the past few years.
There is little overlap in the risks associated with overseas expansions of business operations, as discussed in the two Wall Street Journal articles specified, and for which the links are provided below, beyond concerns of market saturation. In the article on clothing retailer J. Crews (“J. Crew Suits Up for Overseas,”March 22, 2012), the Journal quotes the company’s Chief Executive Officer, Millard “Mickey” Drexler, as expressing his concerns about the potential for a decline in the company’s U.S. operations should the decision to expand overseas prove a distraction from the company’s core market – in effect, the American consumer. Drexler is concerned about J. Crew’s ability to maintain quality control over its domestic operations while focusing increasingly on the pursuit of foreign markets. Reluctant to exploit potentially extremely lucrative markets in China and Brazil, especially the former, where the middle class accounts for over 300 million people, with millions more joining the ranks of the wealthy, Drexler is viewing his company’s entrance into overseas markets as a long-term strategy to slowly grow the company. As he was quoted as saying in the article:
"I think even today it's still somewhat of a distraction, but it's a long-term investment," he says.
The Wall Street Journal article further notes that J. Crew’s expansion into overseas markets faces a risk of spreading the company too thin across too broad a market base. Formerly with Gap, Inc., where he pursued a similar strategy of overseas expansion only to witness that corporation’s growth occurring too swiftly for its own good, Drexler is adopting a more deliberative approach with regard to J. Crews. As the article notes:
“For now, Mr. Drexler is taking his time expanding. The former Gap Inc. CEO grew Gap too big, too quickly and it became a strain on the company's balance sheet.
“Failed stores in Japan—where J. Crew once had 70 locations with a partner—have also left the company cautious. Mr. Drexler closed the stores in 2008 and now leans more toward controlling the company's stores abroad rather than using a partner as a result.”
The article on Neiman Marcus (“Neiman Makes Web Push to Lure Chinese Shoppers,” March 21, 2012) discusses different risks with regard to that retailer’s plans to enter the Chinese market. Unlike J. Crew, which plans to open retail stores, Neiman Marcus is limiting its operations to online shoppers, a growing market all over the world. The problem for Neiman Marcus, however, is that affluent Chinese consumers are not accustomed to online shopping, preferring the “brick-and-mortar” shopping experience. As one industry analyst quoted in the article notes,
“Chinese luxury shoppers prefer to buy in stores, where they can learn about the products, feel them and then flaunt them as they walk out of store, said Ben Cavender, a senior analyst at China Market Research Group. Chinese shoppers are also fearful that the products sold online are more likely to be fakes, said Mr. Cavender.”
Another risk for Neiman Marcus is the expectation among consumers, including in China, that online purchases will cost less than items purchased in retail stores. Again, the article quotes the company’s Chief Executive Officer, Karen Katz, as acknowledging the risk involved in selling online at full price in contrast to its competition:
“Analysts say that another challenge luxury brands face online in China is selling at full price. Most consumers head to the Web for sales and Glamour Sales itself has amassed a loyal consumer base in China, where it rolled out in 2010, with flash sales of discounted goods. Neiman will sell its goods at full price on the site, Ms. Katz said.”
In short, the risks associated with the two companies’ plans to expand overseas are different. What they do have in common, however, is the requirement to understand those new markets and to adapt accordingly. Failure to adapt to the cultural, social and economic conditions of countries in which they hope to expand will result in lost revenue, much to the chagrin of stockholders and private investors alike.