The Yanks are coming

THE Americans are coming. A special SmartCompany investigation into the influx of United States-based companies targeting the Australian market has revealed at least eight brands set to arrive in 2010, with more actively looking at the market.

With the US economy still in the doldrums, these companies see Australia as an obvious choice for expansion, particularly in the franchising sector.

But while many of these companies will find brand recognition in Australia, retail experts say the US companies will need to be aware of cultural, demographic and even language differences between the two markets.

The excitement surrounding the opening of department store giant Costco in mid-2009 is a testament to Australians' love for American retailers. Thousands flocked to the store's Docklands location, and paid up to $60 in membership fees for the right to shop.

But while American companies have always been interested in the Australian market, this interest has gone to another level in the last 12 months.

Costco was clearly the most high-profile retail opening in Australia last year, but ice cream chain Ben & Jerry's also opened to significant demand.

The NexCen group is now committed to opening stores in Australia with its Marble Slab Creamery, Maggie Moos, Great American Cookies and Shoebox New York brands, and is searching for master franchisees and scouting locations.

Management training firm Crestcom International is currently seeking franchisees, pet grooming service Aussie Pet Mobile will open later this month and 1950s diner chain Johnny Rockets is set to make a come-back into the Australian market.

Internet retailer 1saleaday recently opened its Australian site, while jewellery-repair shop Fast-Fix Jewellery and Watch Repair is now set to open soon.

Woolworths is also working hard on developing its big-box hardware chain in a joint venture with US hardware giant Lowe's.

And if reports are to be believed, then popular clothing chains Gap, Abercrombie & Fitch and Forever 21 are currently scouting for locations, while lingerie chain Victoria's Secret is being courted by various shopping centre owners.

Why are they coming?

The attractions for these US companies are simple – both countries speak English, have similar wealth profiles, business practices are the same and consumer expectations are relatively well aligned.

Dan Benton, NexCen director of development for the Middle East and Asia-Pacific regions, also says Australia is a natural choice for the company's brands due to our robust franchising system.

"Australia is popular because it is well known for solid franchising. Franchising is a major contributor to GDP, and there is also more franchising per capita than any other country in the world. We've already been operating there with Athlete's Foot stores, and it's a great market for us, especially with our Shoebox New York brand."

"The franchising law in Australia is actually not nearly as onerous as it is in other nations. The code of conduct forces transparency, and we really stress that within our business partners as well anyway."

Demand is high, fuelled by reports from Australians who have travelled overseas and bring back products and merchandise. The growth of online retail has allowed local consumers to be more open to American concepts.

Melanie Heskin, commercial specialist at the US consulate in Melbourne, who has worked closely with NexCen and Benton, says companies are attracted by Australia's robust economy and similar wealth profile.

"I think reports have gone out to the US recently about how robust the economy is here. Australia's franchising industry is really robust here, and it's also been quite resilient. I've noticed towards September onwards I've had a lot more enquiries in franchising."

"Sometimes it's even due to a lack of understanding. They see a big geographic area and think "wonderful", but then expectations are wound into line when you give them population statistics. They have a pretty good idea of what Australia is about."

Heskin also says Australia mimics American business practices, despite some differences in the law.

"You have business practices, and those are fairly well aligned and you have good customer expectations here as well. There are of course some subtle differences in language, but it's overall a fairly safe and transparent economy"

Brian Walker, chief executive of consultancy firm Retail Doctor, says Australia is a logical first step for American businesses looking to expand internationally.

"For the bigger retailers such as Costco it's simply a question of scale and growth. They are engines that need to grow organically to benefit shareholders, and for retailers it's all about moving into new markets. Our country has seen a lot of Americanisation through media, anyway."

Australians also mimic American spending habits. Benton says both consumers are very much aligned – a major motivation for their entry into the market.

"The two are very similar, particularly from the quick-service restaurant perspective. Our primary target is the middle-class consumer, they eat ice cream and cookies and buy tennis shoes. That domestic market has been our primary target, and it will be in Australia too."

Heskin also points out that several US companies may enter the Australian market just to keep their operations afloat, especially during the financial crisis.

This could be the case with Gap, although reports of an entry to Australia are still unconfirmed by the company. The business recently reported comparable store sales fell by 3%, compared to a drop in 2008 of 12%.

"A lot of companies were, and are, looking offshore to keep their domestic operations afloat. America and Australian have always had a very good trade relationship, and it's been fairly solid, so that offers some incentives."

Why are they so attractive?

American companies are big business. Dozens of retailers, department stores and services companies are employing thousands of Australians every year, and some of the biggest retailers in the country come from overseas, such as the Apple Store.

Retail analyst Rob Lake says the attraction is simple business – convenience and price. If American retailers can offer something different to the market, they'll be a winner.

"Many of these products are popular. Particularly with Costco, it's a convenience issue. You can save quite a bit of money there if you're willing to buy in bulk which is something Australians have never really done before. It's a value offering."

Another massive and obvious attraction is brand power. An American retailer may not have a massively different product range to rivals such as Cotton On or Just Jeans, but if they have a brand name with a good amount of demand behind it, they'll be able to sell and thrive.

It's been suggested companies such as Forever 21 are building up anticipation of their first stores opening by leaking rumours of their arrival. A good amount of demand already exists for Gap, with travellers often bringing back products from their stores, and much has been made of rumours the company will soon enter Australia.

"They do need a brand power," Walker says. "But they also have other things, such as a geographical supply chain advantage, a strong Australian dollar and the ability to handle more retail virtually than at any time before."

"Many are aggressive, price pointed and smart at what they do. They shake the tree when entering the Australian market."

The dangers

By all accounts American companies have done extremely well in Australia. Giants such as Tiffany's have found success in the demand and affection for American culture and products.

But there is absolutely no guarantee of success when entering the Australian market. Differences in culture, business practices and even customer preferences can throw a well-planned business into chaos.

There are plenty of disasters to learn from. Coffee chain Starbucks entered the Australian market with dozens of stores using the same marketing strategy they had in the US – open a stand on every street and people will buy.

But the company underestimated Australian's strong coffee and cafe culture, especially in Melbourne, and closed a number of stores across the country as a result.

Heskin says she often needs to speak with companies looking at the Australian market in the hope of downplaying some extravagant expectations.

"Sometimes a company might say something like, "I envisage 150 units in the Australian market". But we need to break that down and show them some figures, looking at population centres, the major competitors, and then often they'll find that number is not really what the industry can support."

There's also the risk of cultural overload. Analyst Rob Lake says US retailers need to really consider whether the product being offered is American-centric or appeals to a global audience.

He points to the Disney Store, which closed its last Australian locations in 2003. Stan Gordon, chief executive of Franchised Foods, says this is because the company was too brash in estimating the local love for Mickey Mouse.

"We've seen American companies try to impose their will on Australia, and it often doesn't work because they have to be careful to localise that demand."

Gordon also says American businesses need to realise the differences in Australia, right down to population and spending habits.

"This is not a similar market at all, and I'm talking from experience from going overseas. Continent A is not the same as continent B and that is the same in any country. Yes, we speak English but we have different terminology and they need to be aware of those small things."

"It feels the same way on the surface, but it's not. Different wants, different needs, aspirations, likes and dislikes. Do your homework really well. Australians aren't as materialistic a people."

But research suggests Australians are just as retail-hungry as Americans. Household debt has grown to $1.2 trillion, and although retail spending has slid back recently due to three consecutive interest rate rises, Australians are still willing to part with their cash.

However, Heskin says she often needs to make recommendations to companies about how they should market their products and at what price.

"I'll often eat at my client's restaurants and I can see the subtle differences that need to be changed. They might have a sign that says "America's Best Steak", and obviously that wouldn't have a big influence because, who cares here?"

"I'm always talking about portion sizes as well, because it's completely different here. When I'm with clients in the US I often look with big eyes, because there is no way I can eat all of it. Here, they often remark on the small portion sizes."

Benton says this has been a particular difference the company has taken into account when moving into Australia.

"I think the biggest change is the size of the potions involved. In the US, the standard ice cream would be about 250 grams and cost $4.50 or so. But most of our Australian colleagues have told us that serving size is far too large for this market."

"So we don't micro manage our franchisees and their business. But we have taken that serving size recommendation into account."

Walker says there isn't much risk of a cultural overload, suggesting younger Australians are more likely to buy from these new retailers.

"By and large I think we've always been attracted to American brands. I think about Gap, Ralph Lauren, and classic American branded fashion that has been in this country for quite a long time."

"I think among the more sorted middle class the culture thing is not so much of an issue. You turn on your TV and 60-70% of free-to-air television is American content."

Where to go from here?

But the challenges aren't stopping Americans coming here in droves. Walker says businesses won't be held back by the prospect of having to change their tune slightly for the Australian public.

"There are good challenges here, and an opportunity for the businesses to become sharper and fitter at what they do, like any business. It's a very good and compelling offer."

"They do need to do their research but the demographics aren't entirely different. Additionally, Gen Y shoppers are becoming more aware of these brands even though they may not be here yet. Next month's visit from Barack Obama may give these businesses a little bit of a boost as well."

Looking forward, Benton says NexCen wants to position itself as a competitor

"Right now we have three brands that are getting the most enquiries in, and we're looking at locations in Melbourne and all along the east coast...we even have interest in Hobart, where there is potential for a Shoebox New York location. These are getting a fair amount of interest."

"I think your countrymen are interested in American franchises, we've had a lot of interest here already... and we've had a great interaction out there. As long as we have that, we'll have a solid base for business in Australia."

This article first appeared on SmartCompany.com.au, Australia’s premier site for business advice, news, forums and blogs.

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