The European market beckons - Column

Europe means something different to everyone -- the art of Paris, the history of London and the Old World charm of Prague. However, where many hold a romantic image of Europe, America's leading retail chains see a target for business expansion.

This is not a new perspective, of course (Toys "R" Us opened its first European outlet in the early 1980s), but it is a growing one. And there are compelling reasons for this.

Firstly, the American retail landscape is getting crowded; more than 100,000 retail companies filed for bankruptcy in the last five years, 60% more than the previous five years. Companies such as Footlocker and The Gap have successfully expanded internationally after reaching saturation in regional U.S. malls.

Secondly, the European Union (EU) is on the verge of expansion. The European Commission announced plans in July 1997 to enlarge the EU in the next three to five years from 15 member countries to more than 20. This proposal includes the former communist states of the Czech Republic, Estonia, Hungary, Poland and Slovenia and would increase the EU's population from 375 million to almost 500 million. Even outside the EU, the former communist markets of Central and Eastern Europe are currently attracting both U.S. and Western European retailers. The region's prevailing high economic growth (twice the rate of the West) and low levels of retail competition will continue to attract retailers committed to a medium long-term investment.

Thirdly, the generally higher net margins achieved by European retailers are likely to be a continued attraction, although the often higher investment costs in Europe (for example in property rental and wages) required to generate these higher margins can result in a return on capital which is roughly equivalent to those in the United States.

Fourthly, the increasingly Americanized culture of younger consumers all over Europe continues to provide a platform for the likes of Warner Bros., Disney, Levi Strauss, McDonald's and Timberland with their unique, branded product ranges.

To date, American retailers have expanded into Britain as their first European destination. Chris Igwe, European property director of The Gap, highlighted the reasons for expanding first to the United Kingdom: "Like many other U.S. retailers, we decided to `jump ship' into the U.K. as our first European destination due to familiarity with culture and language."

Interestingly, though, when the world's largest retailer came to Europe, it did not follow this well-trodden path. At the close of 1997, Wal-Mart acquired the German hypermarket chain Wertkauf, whose 21 outlets generated $1.4 billion in sales in 1997. It's still unclear, however, whether the transaction was driven by the particular price-consciousness of the German consumer, Germany's central geographic position in an expanded EU, or some other unknown variable. A spokesperson from the office of Bob Martin, ceo of Wal-Mart International, commented, "Given Germany's central location, common sense suggests there are several other markets we would consider."

Regardless of Wal-Mart's next step in Europe, the chain will bring to bear probably the main ingredient of success for U.S. retailers in Europe: proven success in the United States, arguably the most mature and competitive retail market in the world.

Of course, neither this nor the increasing attractions of Europe can remove all risk for expanding U.S. retailers. The most important lesson we can take from successful American companies in Europe in this often-quoted retail mantra expressed by Gary John, European real estate director for The Gap: "Store managers, district managers and country managers are all locally recruited and managed regionally. However, the overall business decisions are centrally controlled by the U.S. -- our motto, `think global, act local.'"

COPYRIGHT 1998 Lebhar-Friedman, Inc.
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