British retailers going global

Marks & Spencer's announcement of a major expansion into China comes just as Tesco launches its Fresh & Easy chain in California. Both must learn from British retailers' previous misadventures overseas. By Karen Attwood

The lure of the overseas market has proved irresistible to many a UK retailer, but not all have returned home to a hero's welcome. Marks & Spencer unveiled a £2bn expansion plan a decade ago to establish a "truly global business" but just three-and-a-half years later it had to beat an embarrassing retreat, closing its flagship Paris store, which had been open since 1974, and selling off menswear chain Brooks Brothers that it had bought in the US in 1988.

The US market has proved notoriously difficult to crack for UK plc and retailer after retailer has returned licking its wounds. But times have changed, lessons have been learnt, the world has become smaller and the consumer more globally aware. Furthermore, the opportunities presented by the rapid expansion of emerging markets seem too good to miss.

M&S yesterday revealed it is to make a foray into China with one or two stores planned for Shanghai next year, capitalising on the growing affluence of the city's middle-class. The announcement came in the same week that Tesco, the UK's most successful supermarket, launches its assault on the US with six stores under the Fresh & Easy brand, and 50 planned for the year end.

As two very British retailers place their bets on new markets it is important to ask what have they learnt from past mistakes. Will the outcome be different this time around?

M&S's chief executive Stuart Rose yesterday batted away criticisms about the company's latest overseas plans calling it "a natural progression" following the retailer's remarkable recovery in the UK under his sure-footed leadership.

"We made some mistakes before but you wouldn't be a successful business if you didn't," he said. Likening the past to a car crash, he added: "It is not the case that you never get in the car again, you get back in and start a new journey. North America was a disaster but Europe wasn't a disaster."

If he had been in the top post a year earlier, he would have not withdrawn from Europe, Mr Rose said. "Europe was doing badly because the mothership was doing badly," he added.

The City is broadly positive on M&S's plans. As Matthew McEachran, retail analyst at Kaupthing, Singer & Friedlander points out: "They will not plunge straight in. They will dip their toe in first."

Of course, M&S already has a significant overseas presence with 257 stores in 36 countries but these are largely franchise stores. It plans to enter China on a wholly owned basis, which presents greater risk but will lead to a bigger prize.

Leveraging off its existing presence in Hong Kong, where it owns eight stores, and Taiwan, where it operates through a joint venture, M&S will focus on fashion and homeware, rather than food. The retailer also plans to up its investment in India, where it already has 12 franchise stores. "We cannot ignore the two big emerging economies," Mr Rose said. Overall, the company sees its international operations' contribution to group revenues jumping from 7 per cent to 15 to 20 per cent within five years.

Jonathan Gabay, a branding specialist from brandforensics, believes the time is right for M&S to make its move on China. "The company is stronger than ever. The booming middle classes in China are obsessed with all things Western."

Tesco is, of course, a different story. Already a proven success in 11 markets, including China, Japan, Thailand, Poland and Czech Republic, it now has its sights set on the States. Its strategy is aggressive. Stores expansion is to be rapid – 200 are expected to be up and running next year. And importantly, though other high profile UK failures in the US have often come following an acquisition, Tesco is building the business from scratch.

Paul Clarke, the head of Barclays retail and wholesale division, said one of the problems in the past was that UK retailers went overseas with an attitude of "knowing it all" and the belief they could repeat their successes in international markets without a real understanding of consumer differences.

"Tesco has done its homework. Tim Mason, who heads the US operations, says his team has been planning the California opening for two years. Philip Dorgan, an analyst at Panmure Gordon who believes the US venture will be a success, points out that Tesco has been researching the US grocery market for 20 years and has turned down many acquisition opportunities during that time.

"It has built a mock-up store in a warehouse and tested it on consumers and has also sent researchers to live with families in order to accurately measure their living and consumption habits," he said.

And Tesco is not going head-to-head with US giants, such as Wal-Mart, but has instead identified a gap in the market. Mr Mason said this week: "Our objective is to produce a local neighbourhood store committed to providing fresh wholesome food at affordable prices."

The early signs from a soft launch at Hemet, in California, last week were positive, he said. Employing 20 to 30 people, the neighbourhood markets are smaller than the typical US supermarket and aim to offer fresher foods at lower prices and a large range of ready meals, which are not done particularly well in the US right now.

Nick Gladding, at Verdict Research, said: "This format doesn't exist in the US. Tesco is so successful because it has been very responsive to customers. It understands what customers want. It has used that with its international expansion and that has served them well."

Allyson Stewart-Allen, a Californian based in London and the author of Working with Americans, a business manual about US culture, said Tesco appears to have done its market research so thoroughly "the chances of failure are low".

But she says Americans may not appreciate self-check outs at some of the stores, as they are used to having their groceries packed for them. "This is no-service at all and I don't know if they will be able to cope with that," she said. "Though if they recognise this means lower prices it may not be a problem."

Tesco is putting £250m a year in the business following an initial investment of £89m. It expects the business to be profitable from its third year. Analysts are predicting 800 stores to be opened by 2012 and sales to grow to £6.9bn within five years. If it is a failure it will mark the end of a glorious career for Tesco's chief executive Sir Terry Leahy but if it is a success it will be one of his greatest triumphs.

Tried and failed: how British retailers have messed up overseas

LAURA ASHLEY

Despite early success in the 1970s and 1980s, the champion of chintzy floral frocks, right, eventually accepted just $1 to get rid of its US empire.

WH SMITH

After 18 years in the US, it took £30m of trading losses for the cards and magazine retailer to withdraw. The post-9/11 collapse in the retail market saw it sell its US hotels retailing business to former management for £8m.

DSG INTERNATIONAL

Dixons acquired Silo, a US chain, in 1987 but a recession left the company unable to compete with larger rivals. The electrical retailer took write-offs of more than £200m to pull out.

BODY SHOP

The ethical cosmetic group's founder Anita Roddick nearly destroyed the company by failing to do her homework before rushing into the US. The campaigning stance did not work but the Body Shop is still there.

HMV

The music retailer closed its three remaining US stores in 2004, drawing a line under its loss-making American adventure.

J SAINSBURY

In 2004 the retailer sold Shaw's, its New England-based business, for £1.37bn to free up cash to placate its long-suffering shareholders.

NEXT

In the early 1990s, Next opened three trial stores, including one in Boston. Lost "a handful" of millions of pounds on the venture before beating a retreat.