U.S.-based retailers and shopping center developers have a tremendous opportunity to gain a foothold in underserved markets internationally and achieve returns 20% to 30% higher than domestic projects, a panel of foreign real estate execs said at the industry’s annual convention in Las Vegas on Sunday. But American retailers and developers venturing overseas — or even into Mexico — must understand the cultural and demographic differences among the markets they serve, the participants warned.

The session served as the unofficial kickoff to the annual International Council of Shopping Centers (ICSC) Convention that is being attended by an estimated 30,000 industry professionals. Panelists included Ian Watt, managing director of London-based Old Mutual Properties. Javier Sordo Madaleno, director of Sordo Madaleno & Associates, a leading developer in Mexico; John Milligan, founder of Retail Resorts International, based in the United Kingdom; and Fernando Zobel De Ayala, chairman of Ayala Land Inc., the Philippines’ largest real estate firm.

American retailers and developers need to partner with experienced professionals in the international markets they choose to enter, said Madaleno. Chelsea Property Group, for example, has entered into a joint venture with Sordo Madaleno & Associates to build outlet centers in Mexico. Phase I of the joint venture’s Punta Norte Premium Outlets, located on a 27-acre site 28 kilometers from downtown Mexico City, is scheduled to be completed in early 2004 and will include 200,000 sq. ft. The site can support a second phase containing approximately 175,000 sq. ft. of gross leasable area.

“A lot of people [developers] who come to Mexico to do business think that it should be an easy market to enter because it borders the U.S., but they find out it’s not so easy because there are important differences to understand, socially and politically,” says Madaleno, who says the cash-on-cash returns for his projects average about 18%.

Watt of Old Mutual Properties agrees with Madaleno, and he believes that some retailers simply are doing a bad job of brand management overseas. Not every brand name is as widely recognized in the global marketplace as Starbuck’s and McDonald’s. The solution is to educate the consumers in a particular market about the value of the product in order to build brand loyalty. “If you don’t manage your brand, you are going to have a problem,” says Watt.

The panelists also stressed the importance of understanding the important demographic trends in target markets that will determine what types of stores, merchandise and retail formats will thrive. For example, in South Africa, close to 50% of the country’s population is 18 years or younger. In Mexico, the percentage of young people is similar.

One retailer that’s ahead of the curve when it comes to understanding the importance of cultural differences, Madaleno says, is Spanish clothing retailer Zara which has 1,500 stores worldwide with Mexico accounting for 14% of the retailer’s global sales. Three of the chain’s top-producing stores are in Mexico City. When the retailer decided to enter Mexico several years ago, it assembled a management team that still resides locally. “It’s a good strategy.”

“I can tell you that No. 1 on the shopping list for any developer outside the U.S. is Zara and Mango [another Spanish fashion retailer],” said Watt. “If you’re developing a shopping center and you can get noticed by them, then you’ve arrived in mecca.”

Any U.S. retailer that hopes to crack the Mexican market now needs to hurry up, says Madaleno. In addition to Zara and Mango, other European chains have already established a strong presence there. “If U.S. stores don’t start opening in Mexico, they will arrive late in a market that is going to be much more competitive in the future,” he warned.

What about Europe? Milligan of Retail Resorts International points out that one big difference between the shopping center industry in Europe and here in the U.S. is that the ownership of property is much more fragmented there and the properties are often much smaller in total square feet. There are 4,000 shopping centers in Europe, Milligan estimates, but there are only about 20 to 25 larger than 1 million sq. ft. Only about six to eight companies in all of Europe own more than 25 centers. Compare that with Simon Property Group, the giant retail REIT, which owns hundreds of centers.

“It’s much tougher for multinational retailers to expand there,” he said. “If you’ve got a great concept in the U.S., you could sit down with the Simon Property Group and roll out 50 stores. In Europe, you can’t do that.” On the other hand, Europe doesn’t suffer from a glut of retail space: store space per capita is about half the 20 feet per square foot of the U.S. So the market may present greater development opportunities. Milligan says the highest returns at the moment are for development projects in Central Europe.

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