Climate change hits US retail

US retailers are battling tough times in the UK, with clothes chain Gap poised to axe stores, and bookseller Borders likely to pull out of Britain to concentrate on its home business.

US grocery giant Wal-Mart was tipped to trail a blaze with its purchase of Asda in 1999, but has so far failed to ignite, while Toys ‘R’ Us is said to have fallen off the radar for many British consumers.

Setting up shop in rip-off Britain has caught out many US retailers. In the US, land is plentiful and rents are cheap. By contrast, square footage rates for prime sites in Britain can be notoriously high and stores have to maintain a consistently high footfall in order to pay their way.

Neil Saunders, consulting director at research company Verdict, says US retailers often wrongly price their UK merchandise. Clothes retailer Abercrombie & Fitch made headlines earlier this year when its first UK Store in London priced items at the same numeric amount as in the US, and it barred UK customers from comparing prices on its US website. The effect is a doubling of price.

Saunders says: “There’s a perception that you can change the dollar sign for a pound sign and get away with it.”

He says this does not work, especially in the clothing market, which has become extremely price sensitive. Spanish retailers, such as Zara, Mango and Sweden’s Hennes & Mauritz (H&M) have moved into Britain, turning the high street into a battleground for retailers. Customers are increasingly expecting fast fashion at low prices as the norm.

Clothing store Brooks Brothers has been an established name in the US since 1818 and claims to be the country’s oldest clothing retailer. In the past year it has opened two stores in London in a “cookie cutter” model of its format at home. It is known as a high street staple in the US, but plans to become a premium retailer in the UK, despite offering little different from its stores in the US.

Historical viewpoint
Saunders warns it is hard to ask someone to pay a premium price without having the heritage of the brand to back it up. “Brooks Brothers has a history in the US. The company has a very strong brand with a long heritage. In the UK, many haven’t heard of it,” he says.

Earlier this year, Borders reported its overseas operations had posted losses of more than £250,000. The group’s international division represents 16% of sales, 70% of which comes from the 72 Borders and Books Etc stores in the UK and Ireland. Despite the disappointing performance, the whole UK bookselling market has been subjected to a malaise in the face of competition from online retailers and supermarkets.

Toys ‘R’ Us, the toy retailer, has also failed to set the market alight. Last year, its US division reported comparable store sales had increased just 0.6%, while the international division only managed to increase sales by 2.6% across its 678 overseas stores. The out-of-town retailer had ambitions, in the 1990s, to roll out a network of high street stores across Britain, but had to backtrack after the stores failed to make an impact.

Both of these so-called “category killers”, who planned to destroy the competition with massive stores, are suffering the effects of the ultimate threat to physical stores – the internet.

But, to ensure success abroad, adapting to the local market is imperative, according to Mike Godliman, director and retail consultant at Pragma Consulting. “Labels in a different font, staff dressed differently, even a different sort of fascia can have an effect,” he says.

One US retailer to do well is TK Maxx (the discount retailer selling premium lines) because it is unique, knows its proposition in the UK and has adapted itself accordingly. It is also understood that office supplies giant Staples has not suffered in a similar way to its fellow Americans.

Gap’s 1987 UK launch was expected to herald a wider US invasion. It quickly grew to become a cornerstone of the British high street. It now has 171 UK stores, but has struggled in recent years at home and abroad. In May, it reported its first quarter profits fell 26%. Where the company was once something of a novelty, critics say it has failed to respond to competition from European retailers.

In the past 18 months, Gap has completely overhauled its strategy abroad. It’s European spokeswoman, Anita Borzyszkowska, says the company had historically operated a global strategy and collections and distribution was carried out centrally from the US. The company is reported to be reviewing its UK store portfolio to make possible cuts, but Borzyszkowska insists the company is continually looking at its portfolio.

The company now has a design and distribution team based in London working on a fairly autonomous basis. This autumn:winter, Gap’s European stores will have all adult clothes designed in Europe. “We realised that customers in different markets have different needs,” Borzyszkowska says.

European retailers are more comfortable localising their offer to different markets and making use of local management, according to Saunders. “Zara is very careful when it goes into new markets and perfectly attunes itself to the local market,” he says. “There’s a tendency with US companies to import the format into the UK without tweaking it. There’s this view that because we speak the same language and are similar in other ways, we’re all the same; but of course we’re not.”

State of independence
Allyson Stewart-Allen, founder of International Marketing Partners, agrees. She is an American who has worked in Europe for more than 20 years and advises US and EU companies. She says: “The management back in the States often doesn’t acknowledge the degree of difference between there and the UK. They assume the rest of the world is like us until you tell us you’re not.” Another retailing expert says: “Americans can struggle to adapt. Europeans tend to be more global in outlook.”

Whole Foods Market, the supermarket group selling organic and natural foods, has just hit our shores to mixed reviews. From a vast store in Kensington, the retailer will be hoping to lure custom away from the likes of Marks & Spencer and Waitrose, which are leading the march in the race to be “green”.

The shop has been panned by some for its layout and location. One expert questions whether the company has done its homework. The vast emporium has been criticised as a step too far from a British supermarket format. And the lack of parking at its central London location makes it unsuitable for a family to carry out a weekly shop. Both are factors that show little understanding of the UK market, one retail expert says.

After Gap entered the UK market, many experts predicted an explosion of US retailers setting up shop. There was speculation in the early 1990s that other category-killers, such as Home Depot, would enter the DIY market. However, the explosion never happened.

In Early 2008, Gap is launching its first Banana Republic store in the UK. As the clothes being stocked will be exactly the same as those found in its US stores, it remains to be seen whether the company has really learnt any lessons from its older cousin.