As established players from the USA and Western Europe look to open retail outlets in the growth markets it’s worth considering the implications of those early openings in new countries.
With many retailers recognising the benefits of opening with local partners or through franchisees there is a danger that location decisions will be left to the local operator. If the franchisor retailer receives a slice of net sales without contributing to property costs there can seem little incentive to play a major role in location decisions. As a UK retailer said recently, “if we get our 15% why should we care about the location decisions of our partners”.
Similarly for those opening fully-owned stores a new country can tempt the business down the route of ‘let’s open stores and see what happens’. Particularly if property costs are lower than in the western markets.
Can you afford to open the wrong location?
Such an approach ignores the main point about location decisions – they can’t be easily discarded. Whether it’s a purpose built store or a shopping centre lease, it’s a long term decision. Location choices result in significant long-term investment and carry important cannibalisation implications for the future network.
Even Tesco who have led the way in selecting supermarket locations have faced problems in choosing store locations. In the USA they have closed over 10% of their Fresh & Easy stores principally because of location selection issues.
Don’t be a cannibal
Using a UK example, opening a major store in London Kensington creates a block on a more profitable opening at Westfield London less than 2 miles away. In this example the stores operating under the same fascia would divide trade to such an extent that neither would be profitable.
Similarly, in Moscow with 6 major shopping centres to choose from it’s unlikely that a department store would want to open in more than 4 centres to avoid excessive catchment overlap. The initial selections could preclude a successful opening in the most appropriate shopping centres. Making the wrong decisions could create a sub-optimal network for the Moscow market for years to come.
A failure to create a ‘road map’ for store openings will result in an initial chase for space, the wrong location decisions, and loss of the best locations in the future. Poor early decisions can also result in early withdrawal from a market that should have been profitable. Why is it important to make the right decision – because even if the brand owner is only getting 15% of sales – 15% of $10m is much more interesting than 15% of $5m.
Can you afford to get it wrong?