Explore how to keep management and organization committed if your KPIs for international expansion don’t meet the expectations.
This post shows how KPIs in new markets can differ enormously from your home market. When starting international expansion, reporting often needs to be reviewed to make sure that you get the full picture and give a new market its fair chance. This is part 6 of my series on international expansion, catch up with my previous pieces here.
Why Do so Many Brands Fail When Entering New Markets?
Yes, there are many objective reasons such as the product not meeting consumer demand, being too expensive or too late, not managing staff quality, higher rents, staff cost and so on. But many brands also fail because of inadequate expectations of top management, business owners and/or the entire organization. Sometimes it is just a question of how to manage or not to manage those expectations successfully.
The best brands start with a business case that takes different retail dynamics and cost structures into account. Unfortunately, many brands still base their business cases on comparable locations in their home market or other comparable markets. The main reason for this being a lack of reliable data about the new market.
Sometimes international expansion departments overpromise in order to get a ‘go’ from their boards. But, more often, brands fail because of inadequate reporting, comparing KPIs and benchmarking them against their home market.
KPI Comparison Germany Versus India
|Germany||India||India vs. Germany|
|# pcs. sold||20.000||16.364||-18%|
|Days open p.a.||308||355||15%|
|Opening hrs. p.a.||3.080||4.793||56%|
Why Can’t You Trust Your KPIs When Assessing Retail in a New Market?
Let’s take India as an example and have a look at some KPIs that the majority of international brands use to evaluate and compare the performance of different markets when planning for international expansion.
Sales Per Sqm (SPSQM)
SPSQM result from footfall, conversion rate and average ticket value combined with the size of the store. Let’s assume for a moment that the store size is the same in all markets. A brand that generates 8,000 €/sqm with a 150 sqm store in a 1b-location in Germany will most likely generate approximately 30–40% less in India in a comparable location (good but not excellent in a top shopping mall). Why is that?
Let’s have a look at footfall – is it lower than in Europe? For a number of reasons I’ve discussed in an earlier post, people in India like to spend their leisure time in shopping malls even when they don’t intend or can’t afford to buy anything. Therefore, the average daily footfall in a top shopping mall is much higher than in a top mall in Europe. Indian malls are open 7 days a week with only a few public holidays (355 opening days compared to 308-310 in Germany). On top of this, Indian malls open on average 13–13.5 hours per day compared to an average of 10 hours for German shopping malls. All this adds up to 56% longer opening hours p.a. in India compared to Europe, and twice the footfall. Lower footfall, therefore, is not the reason for the lower SPSQM performance.
We need to dig deeper. Looking into the footfall that is relevant for your brand, the picture changes. In Germany, 75–90% of footfall in your store might be relevant to your brand because people can afford to buy your product. In India, this share will be much lower. Achieving 30–40% of relevant footfall places you among top 10% of best performing Western brands.
This leads us to the next retail KPI that is typically used to evaluate the success of a retail format when starting international expansion:
Conversion Rate (CR)
As a consequence, conversion rates in India are a lot lower than what you expect from a top location in Europe. As a rule of thumb, your CR will likely be at least 50% lower in India than what you are used to in Europe. When evaluating brand performance and relevance between markets by comparing CR, you need to take this into account.
A proven concept of brands being successful in India (Tommy Hilfiger, Guess, Wrangler, Lee, Diesel) is to strengthen their entry price point products in order to make the brand more accessible to a wider audience. This makes additional sense because it connects your brand with people who might in future be able to buy your higher priced products too.
Average Sales Price (ASP)
This lower CR automatically also results in a lower ASP when compared to your home and other Western markets. Top performing global brands achieve in India an ASP of min. 20% below Western markets. The majority of brands, however, have to expect a 30–40% lower ASP.
Unit Per Transaction (UPT)
On top of these already disadvantageous facts, people also buy less than what you are used to in your home market. As a matter of fact, many consumers cannot afford to buy more than one piece at a time. Your UPT is, therefore, most likely to be 20–40% lower as well.
Average Ticket Value (ATV)
Unsurprisingly, all this adds up to a significantly lower ATV resulting from a lower UPT and a lower ASP. Achieving 50–60% of the ATV in Western markets is no rarity.
In That Case, Why Invest in Retail in New Markets at All?
In other words, why should anyone invest in retail in those markets, given that it is so difficult to generate a sustainable turnover?
The lower-priced product mix will affect your gross margin. And so will the likely higher COGS (cost of goods sold) due to import duties and more costly logistics.
But fortunately, staff costs are significantly lower and rents are often slightly cheaper. Unfortunately, the lower staff cost will to a certain extent be eaten up by the need for more staff. Longer opening hours, lower staff efficiency and higher consumer expectations regarding customer service are the major reasons for this.
However, India and other emerging markets are rapidly growing! And you can still generate a decent 4-Wall contribution due to huge differences in cost structures.
What Makes Some Brands Successful and Others Fail in the Test Phase?
1 Be Prepared
Much international expansion is still driven by opportunity jumping rather than brand growth strategy. When building the business plan for a new market, research as much information about market dynamics and actual retail cost as possible.
2 Manage Your (KPI) Expectations
Calculate three scenarios (best, realistic and worst) and only expand into a new market if you get a ‘go’ from your board even for the worst case scenario. Review your internal reporting and make sure you foster understanding for different benchmarks when internally discussing and comparing KPIs. ‘Pilot store’ is the name of the game. Otherwise, you will be busy with defending your project rather than driving change towards sustainable success in your international expansion.
3 Be Patient
Give the market a chance and yourself the time to truly understand the market dynamics and consumer behaviours. And most importantly, get assurance from top management for an appropriate and realistic timeline. This should be a timeline that allows you to integrate those learnings into your store format.
4 Be True To Yourself
As a brand, you have to fulfil a promise to the consumer. Consumers in new markets need to have the same brand experience as consumers in your home market.
5 Embrace Change
Be open and accept that how to fulfil this consumer promise might differ from market to market. This is the reason why TopShop failed in Australia and New Zealand and why H&M is never among the pioneers when it comes to expansion into emerging markets.
TopShop failed to deliver its consumer promise: affordable fast fashion! Higher cost structures in Australia and a longer time to market resulted in higher retail prices and fashion trends a season behind. And H&M needs a brand environment in which consumers understand that its product is more fashionable and more affordable compared to other Western brands.
6 Integrate Learnings From International Expansion
Be open to integrating learnings from new markets into your business model. While too many brands still just roll-out a proven concept, the successful ones try to understand whether and how their concept works in new markets. Draw on those learnings and consider whether they could improve your brand positioning in your home market. And if so, integrate them!
About the Author:
Heike Blank has worked for big organisations such as VF Europe and s.Oliver but also for niche brands such as Ecko Unltd. and Zoo York in top executive positions. Her extensive experience with opening and managing own retail, partner stores, concessions and shop-in-shops in 23 countries in Europe, the Middle East and Asia make her a true expert in international expansion. Heike excels at finding a brand-specific balance between customising and standardising the business model when conquering a new market. Please feel free to email her to discuss these topics, or learn more about her here.