Apparel brands know international expansion is a necessity. But despite its importance, it’s often mishandled as companies chase quarterly earnings targets and race for market share. Too often, apparel brands expand too quickly without a clear retail expansion strategy that aligns with their long-term objectives.
Although it’s only one piece of the overall expansion strategy, choosing the right business model may be just as important as choosing the right market for expansion.
There are two steps to determine the optimal business model for international expansion:
- The first is to determine the optimal global business model based on the company’s long-term strategic priorities.
- The second takes country-specific considerations into account that may override the preferred global business model.
Global Business Model
Determining a global business model before selecting specific international expansion targets is critical. Here are five guidelines for a global business model:
- Brand Control. The owned-and-operated model provides complete, vertically integrated control over how a brand is represented and how its customer experience is delivered. Brands can ensure that store staff is properly trained, that inventory is effectively merchandised and that stores are well maintained and consistent with brand standards. By comparison, brands with a wholesale heritage tend to be more comfortable giving up brand control to a trusted partner.
- CapEx. The franchise model requires less capital since the upfront costs—key money, general contracting, furniture and fixtures—are typically paid by the franchisee or shared between the brand and the franchisee. The franchisee also provides working capital for inventory. Thus, the franchise model is more attractive to capital-constrained companies.
- Speed of Growth. The franchise model can facilitate a more rapid expansion. First, a good partner will have local know-how, including knowledge about real estate, labor, government regulations and most importantly, consumers. This local knowledge can help increase the brand’s speed to market. Second, a franchise partner will augment the brand’s available capital and human resources, allowing it to open more stores, faster.
- Profitability. The owned-and-operated model allows the brand to capture 100 percent of the gross margin. Assuming four-wall costs are managed effectively, owned-and-operated stores typically deliver higher four-wall EBIT.
- Financial Risk. Although the franchise model is typically less profitable from a gross margin standpoint, it’s also less risky because the brand has to commit less capital up front, and profit is based on a negotiated markup with the franchise partner. The sell-in revenue model carries significantly less variance in performance. However, since the franchise partner is taking more risk, they also capture more upside if things go well.
Country-specific Business Model
Although a brand may prefer to implement its global business model in all countries, doing so may not be possible or advantageous in certain markets. These four criteria help determine the country-specific business model:
- Regulatory Environment. Country specific regulation regarding foreign direct investment and franchising may dictate which business models are possible in a given market. For example, in 2012, India started to allow 100 percent foreign direct investment for single-brand retailers, albeit with some conditions. Previously, all foreign single-brand retail stores required a joint venture with a local partner.
- Partner Capabilities and Real Estate Access. Availability of capable franchise partners is an important consideration when looking at international expansion. A capable partner will have access to real estate, a long track record of retail success and the financial resources to expand. A country with a deep pool of capable partners can make the franchise model much more attractive.
- Structural Economics. Countries with a limited-potential market size may not be worth the investment required to build out a full owned-and-operated model. But working with a local partner may provide a win-win solution that allows the brand to capture market share and minimize up-front investment.
- Country Risk. Developing countries may face political instability and economic uncertainty, making them less attractive for investment and more conducive to a franchise business model.
Hybrid Business Model
It’s also possible to consider a third, hybrid option, using a combination of the two models in the same country. The hybrid model is most commonly used by brands that wish to retain control over flagship stores in major cities while franchising the remaining stores in less strategic locations.
By using this framework to evaluate global and country-specific business models, brands can ensure they’re getting the most out of their international expansion plans—in the short and long term.
Many Roads to International Success
These examples illustrate that there are many ways to apply both global and country-specific business models to make smart, successful expansion decisions.
Gap: When Real Estate Is Scarce
Only about 13 percent of Gap’s 3,539 global stores are franchised, but when the brand was looking to expand into the Middle East, an analysis of local conditions pointed toward a partnership. Access to real estate is difficult in many Middle Eastern countries—vacancy rates can be as low as 2 percent and retail space is tightly controlled by a few large players. Starting in 2006, Gap worked with Al Tayer Group to bring 25 Gap and 10 Banana Republic stores to key markets in the United Arab Emirates, Kuwait, Qatar, Bahrain and Oman. Since then, Gap has opened more than 40 stores in the region and successfully introduced Gap Kids. After the success of this initial expansion, the company recently announced plans to bring Old Navy stores to six countries in the region, partnering with Fawaz A. Alhokair & Co. and Azadea. Alhokair, for example, will help Gap access real estate through the 16 malls it owns throughout the Middle East.
H&M: Waiting Until the Time Is Right
H&M strongly prefers the owned-and-operated model. In fact, of its 3,551 stores around the world, only 3.7 percent are franchised. The company didn’t want to change this global strategy even as it looked to enter the enticing Indian market. Before 2012, foreign direct investment regulation in India required foreign retailers to find a local franchise partner. Many of H&M’s competitors, including Tommy Hilfiger (PVH) and Zara (Inditex), did just that. But H&M only announced plans to enter India after regulations changed in 2012 allowing 100 percent foreign direct ownership of single-brand retail stores. After receiving government approval to open 50 stores in 2013, H&M’s first Indian store is set to open later this year.
Abercrombie & Fitch: Going It Alone — Until Now
For years, A&F has exercised strict control over every element of its brand, especially the customer experience—from product merchandising, lighting and fragrance to store labor standards. Everything is designed to keep the store experience consistent no matter where in the world you are. A&F maintains this control by owning and operating all 969 stores in its fleet—including 170 stores outside the U.S. However, in a recent departure from this strategy, A&F announced that it would enter the Mexican market with franchise partner Grupo Axo. A&F will be entering Mexico two years after direct competitors American Eagle Outfitters and Aeropostale. Although A&F is late to the party, Grupo Axo is an established franchisee that could provide A&F with local know-how and a competitive edge.
VF Corporation: Rapid Growth Enabled by Local Franchise Partners
VF Corporation, which owns brands such as The North Face, Vans and Timberland, currently has 4,400 global stores—and roughly 70 percent are franchised. This strategy helps VF grow quickly. In fact, between 2010 and 2014, VF opened 699 new stores—not including 188 from its acquisition of Timberland. And VF shows no signs of slowing down. By 2017, VF expects its direct-to-consumer business to reach $4.4 billion—40 percent larger than it was in 2014. Much of this growth will come from Asia, where VF expects to have 6,000 stores by 2017. To help tackle this challenging market, VF will continue to rely on local franchise partners. As Adrian O’Meara, VF’s Asia Pacific president, says, “The thought of us running 2,500 stores with six people per store and 40 percent staff turnover would be a monumental effort. You’re often dealing with local decision-makers and so the stores are also best managed locally.”