U.S. Retail Lull Means Prep Time for International Expansion
Mexico, Asia, Russia seen as likely markets

The Franchise Model continues to be popular with low risk;Outlets also seen as growth engine

U.S. retail giants in home furnishings, food and clothing are expected to push into emerging markets such as Mexico, Brazil and China, once the U.S. economy and cash flows improve, executives said.

“There are a lot of retailers who are in defensive mode right now, but a lot of retailers still have ambition to go abroad,” said Anthony Buono, executive managing director of CB Richard Ellis, the world’s largest commercial real estate services company.

Global retailers are eyeing new markets, Buono said at the International Council of Shopping Centers’ Recon retail real estate show in Las Vegas last week.

Growth in Latin America, the Middle East and Asia as well as the prospect of a shrinking domestic economy is causing U.S. corporations to look abroad.

U.S. brands already expanding globally include Collective Brands Inc, owner of PayLess, which has its highest-performing stores in Colombia and Dunkin’ Brands, which is operating Dunkin’ Donuts shops in 31 countries from Bulgaria to Qatar.

Wal-Mart Stores Inc is due to open its first cash-and-carry store in India on Saturday. AutoZone Inc, Gap Inc and Brinker International, the owner of restaurant chain Chili’s, are expanding in Mexico.

Frozen yogurt maker PinkBerry, which has inspired cult-like status in its home market of Los Angeles, is opening a store in Kuwait City this summer, with another in Dubai to follow.

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Joe Albright, Wal-Mart’s vice president of international real estate, said diverse formats designed to appeal to many had made Wal-Mart’s international unit a $100 billion business.

For many retailers, franchises and joint ventures offer common ways to expand because they minimize risk.

“It gives us an outlet to sell our product in, but we’re doing it with a third party, who puts up the capital to open the store,” said Levi Strauss spokesman Jeff Beckman. He added Levi’s is now seeking “opportunistic” deals afforded by the economic downturn.

Brinker, operator of Chili’s, plans to open up to 18 eateries in Mexico this year, adding to its portfolio of nearly 200. AutoZone is looking to add to its 160 stores in Mexico.

“We’re here to do deals,” AutoZone director of real estate Terry McKee said while at the convention.

The top brands sought by foreign consumers, according to a study by mall developer, Taubman Centers and Shop America Alliance, are: Nike, Levi Strauss, Gap, Polo and Abercrombie & Fitch. All of these retailers are planning overseas expansions.

Abercrombie says international stores will eventually make up half of total sales from the approximately 8 percent today.

VF Corp, owner North Face and Vans, plans to open 70 stores this year, pared back from its previous rate of 100, with most on a proportional basis in Europe and Asia.

Besides full-price stores, retail outlets are another venue for global growth. U.S. brands are keenly interested in outlet stores in Russia, especially in Moscow, said Neil Thompson, chief executive of outlet developer Fashion House Development. His company is opening 16 outlet centers in Russia.

“I get two (calls) a week,” from U.S. companies interested in opening stores first in Russia, Thompson said.

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Golden Tulip Hospitality Group, has signed a development and representation agreement with IFK Hotel Management, a Moscow-based hotel management company.

Golden Tulip proudly announces the recently signed development & representation agreement with the Russian hotel management company, IFK Hotel management. This agreement enables the Golden Tulip Hospitality Group to continue its growth by entering the promising Russian market.

IFK Hotel Management is a professional company specializing in hotel and (hospitality related) property management in Russia. As official representative of Golden Tulip Hospitality Group, IFK hotel management will bring forward the brands Tulip Inn, Golden Tulip, Royal Tulip, George & CO and BRANCHE Restaurant, Bar & Lounge.

Hans Kennedie, President & C.E.O. of Golden Tulip Hospitality Group comments: “We are very pleased to announce Golden Tulip’s first entry into the Russian Federation and the co-operation with IFK Hotel Management. The years of experience on the Russian hospitality market of Mr. Izmaylov and his management team will be of high value for the global development of the Golden Tulip portfolio.”

Marsel Izmaylov, CEO of IFK Hotel Management, adds: “Golden Tulip’s brand recognition and its proven success track record gives us the necessary tools to develop new projects in this region. I am delighted to be a partner of Golden Tulip Hospitality Group and intend to put Golden Tulip’s brand into leadership positions in the Russian market. I am sure we can bring “local flavours” to almost half a century hospitality traditions of Golden Tulip.”

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Britain’s third biggest retail group – Sainsbury’s – looks for an opportunity to enter the Russian market. Until now, Sainsbuy’s was only in UK. Fall 2009 marks deadline for final decision on Global Expansion.

The third biggest retail group in Great Britain Sainsbury’s is actively seeking an opportunity to start operations in Russia. Several top managers from Sainsbury’s have already visited Russia. According to the local market players, the British managers plan to study the Russian retail industry for 3 months in order to make a decision concerning their business in a new market by autumn. Goldman Sachs consulted Sainsbury’s about the issue. A representative of the bank notes that Goldman Sachs is considering obtaining an M&A mandate for Sainsbury’s in Russia.

Headhunting agencies and a number of investment bankers in Moscow are already aware of Sainsbury’s plans. According to a Moscow banker, Sainsbury’s has already negotiated a possible deal with representatives from X5 Retail Group (retail groups Piatyorocka, Perekrestok, Karusel and others), Victoria, and Paterson.

Victoria’s president Nikolay Vlasenko confirms he has met with five top managers from Sainsbury’s who work in the company’s headquarters in the departments for procurement, logistics and strategic development. As Mr. Vlasenko says: “This visit reminded me of Wal-Mart’s arrival in Russia. Although Sainsbury’s is now interested only in Moscow.”

Sainsbury’s is the third largest retail group in Great Britain. The company was established in 1869 and now has 792 stores, most are mainly a supermarket format. Last fiscal year (ended on the 22nd of March, 2008), the company’s sales amounted to $30.5 billion with a net profit of approximately $519 million.

In 2007-2008 Sainsbury’s lost market share in the food retail sector (in 2008 the company’s market share was 16.3% ceding to Tesco and ASDA), points out Antonia Branston, a Euromonitor analyst. “In the short run it would be more logical for the company to strengthen its positions in the domestic market,” believes Ms. Branston. Though, in a longer run Russia can be considered as the most reasonable market for the company’s foreign expansion in future. “Western retailers are already present in most Eastern European countries,” says Ms. Branston, “in the Czech Republic, for instance, their market share amounts to 50%.”

Last year in Russia, the five biggest food retailers (including the German Metro Group and the French Auchan) accounted only for 11% of the market (according to the Russian Federal Statistics Service, the retail turnover in the Russian food sector in 2008 approximated to $235 billion) while all chain retailers together comprised 34-35% of the market. Sainsbury’s will have a good opportunity to enter the Russian market if the company takes over a local retailer. But the British chain will face stiff competition with Carrefour, Auchan and Wal-Mart.

In 2009, the French retail group Carrefour opens its first hypermarkets in Russia – in Moscow and in Krasnodar – and will probably take over the Russian retailer Sedmoy Kontinent. In November, 2008, Terry Leahy, the general director for Tesco (a retail group present in 13 countries, including China and Thailand), also announced his company’s plans to enter the Russian market.

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One way the Financial Crisis has manifested itself Worldwide, is that Franchise Entrepreneurs/Operators are more selective with their ‘Currency’  and more discerning in their views of what would constitute an absolutely ’Slamdunk’ Master Franchise opportunity.  
Conversely, as we all know, without steadfast persistence and honest effort on the part of their Country/Master Franchisees, even the most promising Franchise Concepts are not guaranteed success. It is vitally important that a Franchisor expanding into new Territories and Markets avoid any mistake when it comes to choosing the right Partners!

To cite a positive example, we can look at the Sbarro Franchise in Russia. In 1996, a Russian entrepreneur named Merab Elashvili decided to start his own restaurant business, his first step was to travel around Europe in search of a suitable format. There were lots of variants, including many franchising opportunities which at that time were quite new to the Russian market. He ultimately chose Sbarro as his Franchisor, because they offered decent quality for reasonable price. Moreover, the company provided substantial support at the start-up stage of a new project. To Merab, all that seemed necessary to do was just follow the instructions and succeed! Of course, Sbarro was eager to share all its ’secrets’ with a new partner.

By the summer of 1998 there were already two Sbarro restaurants in Moscow. But then, in August, the Russian financial system faced a hardly predictable crisis. Many Russian businessmen shuttered their enterprises. Merab Elashvili was wise enough to understand that all people still need to eat. Additonally, this was a local crisis and the rest of the and World and Sbarro had no ’secret sauce’ to apply to the situation. It’s Russian Franchisee showed great foresight and  initiative and instead of downsizing; started to expand the Sbarro chain throughout Russia – to Saint Petersburg and all the other major Russian cities. Naturally, in 2002, 2004 and 2006 the franchisor named Sbarro’s Partner of the Year, (for obvious reasons). Sbarros sit on almost every street corner in Moscow and are conspicuous throughout Russia, today.

The key to success, any where, is the understanding of the fact that the Franchising model doesn’t automatically mean outstanding achievements for a Franchisee. It requires hard work from both sides and IT HAPPENS IN RUSSIA! Nevertheless, even in the US, there will  always be people who believe that with the simple act of buying a franchise, paying a lump sum payment and royalties; they are buying a 100% guarantee of success. They believe that the training and support that a franchisor provides will allow them to just have to calculate their income…

The truth is, local entrepreneurs know local customs and conventions, all ins and outs. And this knowledge – coupled with the benefits of a Franchise – yields good results provided that the franchisee doesn’t sprawl about on a chair and wait for some miracle to happen to his business.
 
The franchising industry in Russia has seen a steady growth in demand over the past decade. There are more and more people in the country who want to set up their own business and utilize the best practices of their more experienced colleagues. Though, the growth in demand for franchising opportunities of all sorts and kinds also means a proportionate increase in the number of those not so ambitious types who look not for partnership, but for a carefree existence. Real players will be very attentive to all the details of the Franchise Offering. They will want to know everything about how a Franchisor will help them with hiring suitable staff and training them, providing them with all the methods and techniques necessary for an efficient operation, etc. At the same time these are the Pros who understand that a franchisor can teach and guide, give advice and consult them but cannot assume the responsibility for all the risks that any business is bound with. They CAN understand that the Franchisor doesn’t own a Franchisee’s business!
 
Luckily, more and more entrepreneurs in Russia have become aware of the advantages Western Concepts have and look for the best offers. It is essential for Franchisors to pick up those businessmen who understand the simple truth of franchising – a franchise doesn’t give one fish; it gives a man (and woman) a fishing rod and teaches them how to fish.
Though the number of Russian entrepreneurs ready to start up new businesses have been reduced, the interest in franchising, of those that do remain, remains rather vivid. Moreover, the number of those who want to survive the hard times with the help of a proven business model has increased over the last 6 months. There is always a positive side of an otherwise negative situation. For Franchising in Russian, the financial crisis hitting the country created a unique opportunity for Western Concepts, as well, to explore the new market.

 There is more commercial real estate available on the market, cheaper rent, reduced salaries for staff – these and other factors testify to the fact that for those who want to enter the market and establish their business here with Partners like Merab Elashvilli; the time for action has come.

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