E-tailers: Be choosy overseas

When choosing which foreign markets to enter, it's best for e-tailers to look beyond the numbers, says Matthew Cushen.

Last year I wrote a column saying that for some retailers international expansion is a welcome diversion from domestic gloom, given the fall of sterling against the dollar and consumer desire in developing markets for Western brands and a sophisticated retail experience .

In that article I discussed bricks and mortar retailers but there are also opportunities to take online offers overseas. Amazon, for example, is aggressively expanding beyond its North American home territory. In its fourth quarter of 2008, the e-tailer's overseas revenue increased 31 per cent, while home sales grew 18 per cent year-on-year. International operating profit was up by 48 per cent against a reduction in home business of 15 per cent - so Amazon now sells nearly as much overseas as it does domestically and makes a much better return for the international sales.

But not everyone has such an advanced online model as Amazon. There are certainly many implementation challenges in running online operations overseas including different languages, different currencies and local fulfilment. However, the fundamental basic challenge is choosing where you want to do business and when.

The first issue for bricks and mortar retailers to consider is whether the brand is already established in a location. But for all retailers the choice and priorities of countries to enter will be impacted by many criteria that define the variable appetite for online retail across the globe.

For instance, broadband penetration. In the UK, the growth of broadband was a key driver in the increase of online retailing. According to June 2008 figures from the Organisation for Economic Co-operation and Development, Denmark has the highest broadband penetration at 37 per cent of the population compared to the average of 21 per cent. But these numbers are growing fast, on average by three points per year. These metrics are critical to consider alongside the normal marketing measures of gross domestic product per head and average retail spend.

One must look at the whole picture when considering selling to a new market. For instance, India and China might have an attractive breadth of population, a young demographic (in India) and a burgeoning middle class but broadband participation is low and delivery logistics are difficult.

Saudi Arabia also provides a great case study of the need to delve deeper than the numbers.

In Saudi there are several barriers to the growth of internet retailing. First, bricks and mortar shopping is a large leisure activity, so malls are a draw as much for entertainment as for spending. Direct delivery to the home is often not an attractive option - a strange male coming to the home while a woman is there alone is culturally sensitive.

Shopping is much more cash-driven than the West and credit card usage is low (as the Shari'ah principle of Riba forbids the paying or receiving of interest). Therefore payment is a significant, practical barrier, although all the banks are busy attempting to introduce trusted payment methods.

But there are also many reasons why e-tail could prove popular in Saudi Arabia. For example, women are not allowed to drive, so buying online could be practical and empowering for them. And while use of the internet was forbidden until 1999, the government has since been much more encouraging of its adoption of broadband infrastructure is being rolled out fast, connecting all schools and making the internet a core part of education. A target is to have all government administration conducted electronically within the next five years.

On balance at Kurt Salmon Associates we are very bullish about the potential of e-tailing in Saudi Arabia. We predict it will be early 2010 before the economics are going to become credible for new e-tail ventures, yet this timing will still provide some first-mover advantage.

Saudi is but one example. Other countries will have very different characteristics and considerations. Understanding these factors, alongside the numbers, will ensure good investment decisions are made regarding where and when to roll out an e-tail offer.

Matthew Cushen is the director of international strategy at management consultancy Kurt Salmon Associates.