Welcome to The Merchant Life where founders, VPs, and C-Suite executives come to seek out valuable merchandising insights.
In this edition, we help you plan a break and enter.
Not the type that could get you slapped with a Class H Felony.
We mean the type that allows retailers to break into new markets in a way that sets them up for success.
And success is broken down into three simple steps: Immersion, Testing, and Scaling.
To get it all started, we need to look up to the north.
Earlier in March, news broke that Nordstrom will shut down operations in Canada - citing a lack of a “realistic path to profitability for the Canadian business”.
Nordstrom will close its Canadian stores by June and, in the process, cut 2600 jobs.
This was after launching in Canada in September 2014, with its first store in Calgary, Alberta.
Retail experts weighed in with their insight, including our own Liza Amlani.
Not only that, Nordstrom left shoppers bewildered at the lack of deals at their store closing sales.
Of course, media coverage brought up the not-so-distant past of Target taking its final curtain call in Canada in 2015.
After only two years of business.
And arriving after much excitement.
Yes, we do remember.
Nordstrom and Target are notable examples of brands flopping in Canada. We should also acknowledge the similar fates of Bed Bath & Beyond and Lowe’s.
But these are better looked at as the exceptions rather than the norm.
Expansion into new markets can be (and is) done with tremendous success.
It’s not limited to traditional retail either.
Since we are focused on Canada at the moment, consider these examples of brands setting foot in the north.
Some of the names might be familiar to you:
In 1994, Wal-Mart gained a foothold by acquiring 122 Woolco stores. The stores were 100% converted and opened by 1997.
Also in ‘94, Home Depot opened up in Thornhill, Ontario.
A coffee shop called Starbucks opened up in Vancouver, BC in 1987.
Zara opened up shop with 1 store in Toronto, on 50 Bloor West, in 2003.
Toyota Canada Inc. was established in 1965.
Costco started in Burnaby, BC in 1985.
One might argue that the Canadian market is not lucrative enough for luxury brands, contributing to Nordstrom’s struggles. Consider that Louis Vuitton has been operating in Canada since 1980 and other names like Gucci and Prada also have a presence.
This indicates that the flops of Nordstrom and Target are not about an infertile market, lack of spending power, or the ever-classic “it’s the economy!"
This is about poor execution.
We want to ensure that a brand has everything they need before embarking on an expansion. There are three simple process steps to follow that we outline below.
Mind you, these are simple, not easy.
Operational discipline is needed to give the expansion a chance for success.
Naturally, a brand needs to go learn about its potential, new customers, and where they live. Census data, future real estate developments, transportation infrastructure, and other relevant information need to be studied.
That type of research is table stakes.
And it can help identify ideal candidate locations for a store opening.
Do one better and go visit the cities in which you intend to open a store.
City hop. Identify regional similarities and differences in major cities across the country. Take note if the cities are driving or walking cities. This reflects typical attire and footwear.
Comp shop. Visit your competition as if you were a merchant comp shopping. Spend time in stores and observe what customers buy and don’t buy. Ask brand ambassadors what customers are requesting to determine gaps in the market.
Take note of localization and cultural considerations compared to your home base. Note how are the stores assorted to reflect the local characteristics. Are there any patterns or major differences?
During market immersion, consider retailers and brands that have entered the market and failed. Understand what happened and why to avoid repeating costly mistakes. Countries have trade offices abroad to help retailers enter their markets - they might be able to flag obstacles before you encounter them.
This is the stage where operational, legal, language, and administrative considerations have to be worked through. For example, taking a close look at Canadian textile labeling laws in advance could have saved us a frantic call from HBC telling us that the Ralph Lauren F16 collection needed to be removed from the sales floor.
Why? Because the products were shipped from the US and labeled by the factory for sale in the US only. Specific, and compulsory, textile fibre content was missing from the labels.
Finally, look at flexible or short-term lease agreements. This will save pain down the road should market expansion end up falling short.
Breaking into a new market means starting small, testing the market response, and incorporating feedback for improvement.
Recall Wal-Mart in 1994. Entry into Canada was secured by acquiring 122 Woolco stores.
However, only two locations were opened that year. By 1997 the remaining 120 opened.
In contrast, Target arrived in Canada in 2013 and announced the opening of 125 stores for that year.
A billion-dollar loss followed.
So, start small. The launch location is the test store. Focus on getting the trifecta of store planning, product mix, and customer experience right.
A modular store layout will allow you to build and rebuild according to how customers want to shop. Learning what is important to the customer and having the flexibility to adjust accordingly and quickly will build customer trust.
The location should be in the closest proximity to your corporate office where executives and merchandising teams are. For example, if your head office is in Seattle, then Vancouver would be a good choice. Teams need easy access to the new market as frequent visits are crucial in identifying customer shifts in behavior. Also, this minimizes disconnects between strategic plans and in-store execution.
Having one location allows for flexibility in the product assortment. This enables the quick removal of items that are duds and the arrival (better yet, replenishment) of desirable items.
The result is the creation of a product assortment and customer experience that builds a deep connection with the customer.
Markers of success are full-price sales, meeting gross margin plans, and inventory turnover.
Market immersion indicates the similarities and differences across cities and customer segments. It also identifies an ideal candidate for a launch location(s).
Then, testing the market allows you to adjust the product assortment and course correct when needed.
The third step is to scale. This should only be considered once a deep relationship is established with the customers - that means repeat business, positive feedback, and significant full-price sales.
Scaling should proceed with these steps in mind:
Subsequent store locations are determined through continuous market immersion and testing. For example, pop-up stores to gauge interest is next-level testing without major commitments. While working with Ralph Lauren, our luxury team would test Polo in stores that carried Purple Label before opening another Polo shop in shop. In many cases, the pop-up was the gateway to a permanent fixture.
Commit to a regional home office. Having a local office will allow for faster response times to customer shifts in buying behavior and resolutions for problems.
Open a local distribution center or 3PL. Getting products to stores and across channels quickly keeps customers happy and makes shipping costs more manageable.
Mind you, the process of expansion does not stop at this point. There are more geographical markets and segments that could be explored. Expansion need not be international, it can also be domestic via unique partnerships. It can also mean digital brands opening a physical presence and vise versa.
Whatever the case, the process of immersion and testing is continuous - because the customer is dynamic and ever-changing.
And when there are clear signs of a winner, the investment is then made to scale.
Who knew a break-and-enter could be profitable?
The idea of preventing a blizzard might make you scratch your head.
How would you do that? Well, you can't. The only thing to do is develop the best possible contingent actions.
Product creation has its own blizzard to contend with. The one that consists of pushed-out deadlines, overdevelopment, and hampered speed to market. We notice that brands respond mainly with contingent actions.
In contrast, a more innovative approach is to create preventative actions - stopping the storm before it starts.
Read more about the examples of preventative actions that market-leading brands are using today —> Download your copy here.
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