The world population stands at nearly 6 billion people. Since not quite 270 million of them live in the United States, the global market might seem like a gold mine to American retailers and shopping center developers. It can, however, turn out to be more of a minefield for the unwary, as the current Asian economic crisis all too clearly demonstrates.
While opportunities exist, analysts say, there are fewer than many American companies expect. Regional retailers have established a solid foothold in many areas, making it difficult for U.S. companies to gain entry. Strong developers also already exist in most regions, and their knowledge of local building regulations and connections with government officials often preclude American developers from coming in. And far from being underdeveloped, many markets are approaching saturation.
"There has been a tremendous amount of mall development all over the world," maintains Dr. Ira Kalish, senior economist with Management Horizons, the Los Angeles-based retail consulting division of Price Waterhouse. "We're on the threshold of saturation in a number of markets."
Even before the Asian crisis hit, Kalish warned of problems in the region. In an interview for Shopping Center World last summer, he pointed to danger signs in several countries. He used Malaysia as a prime example of a country heading for overdevelopment.
"In 1996, there were 15.6 million sq. ft. of shopping centers in Malaysia. Based on current plans, there will be 40 million sq. ft. by 2000. Whether or not that's too much, it's hard to say. But to fill up all that space is going to very difficult," he predicted.
Kalish offered the Philippines as another example, pointing out that Manila has 2 sq. ft. of shopping center space per person. "That's less than the U.S., but you have to consider that the Philippines is a very poor place. Jakarta has only 1 sq. ft. per person, and it's considerably richer than Manila," he noted.
While Kalish was prepared for the widespread economic unraveling, many analysts, including top government advisers, were taken by surprise. The world is obviously full of unpredictables, and even when economists do foresee troubles, they don't necessarily foresee how serious the troubles will be or recognize all the ramifications.
Natural disasters rarely have more than fleeting impact on the United States and other highly developed nations, but they can devastate the economies of poorer countries for long periods. It is all too easy, analysts point out, for American companies to overlook the serious financial setbacks that can arise in the Third World from a series of unusually severe hurricanes, an earthquake or a prolonged drought.
Political change also can bring more dramatic change to some foreign countries than it typically would in the United States. For example, in terms of business, the difference between the administrations of President Bush and President Clinton are infinitesimal compared to the difference between the Iranian government under the Shah and under the Ayatollahs.
Despite the obstacles, observers nonetheless say some American companies can profit in foreign markets if they know what they are doing. Most other nations have fewer stores per capita than the United States, and while incomes are low in many regions, the sheer number of customers often more than compensates. In addition, many Third World countries are rapidly developing a significant middle class with a taste for American and European goods.
Population densities tend to be higher in other countries, so the number of potential customers for any particular store is often many times that of a stateside location. For example, according to the Worldwide Industry Practice of Arthur Andersen Consulting in New York, the United States has a population density of about 29 people per square kilometer. France has 108, the United Kingdom 234, Japan 332, South Korea 464, the Philippines 1,536 and Hong Kong 6,400!
That means for every person who passes a particular store in this country, 229 people would pass the same store in Hong Kong. On the other hand, experts warn not to let high densities fool retailers into believing a large number of sales is inevitable.
"Many markets are very tempting because of the numbers of people and the amount of spendable dollars they appear to have. It's easy to get seduced," says Kelly Heed, vice chairman of Colliers International in Vancouver, B.C. "The amount they actually have to spend may be much less than it looks because everything is so expensive."
Stories of the Japanese paying from $5 to $25 for a single grapefruit are widespread. And as anyone who has traveled to Europe recently knows, an everyday garment in most European countries can cost one and a half to two times as much as it does here. The reason: high import fees and taxes built into the wholesale price, as well as high overhead costs for rent, utilities and labor subsequently factored into the selling price.
Household rent also takes up a larger portion of income in many other countries. "In the States, most people pay about 25 percent of their income on shelter. In Hong Kong, it's 50 to 60 percent. Consequently, they don't have quite as much to spend on 'toys,'" says Heed.
Retail opportunities Setting up shop in foreign nations has as many pitfalls as opportunities, and American companies hoping to do business outside U.S. borders need to step with care.
"Many markets are open. The problem is knowing how to operate in them," says Heed. "Typically, the pattern of retail is totally different from the United States and Canada. The real problem is, do [North American retailers] know the shopping patterns of other countries? Do they know what will click? Don't assume what works in North America will work somewhere else," he says.
In an interview in the June 1997 edition of Arthur Andersen's International Trends in Retailing, Masatoshi Ito, founder of Ito-Yokado Group, the world's second largest retail company, delineates important distinctions between American and Japanese consumers.
Among the differences is Japanese customers' insistence on expert tailoring. A seam that is not exactly straight will kill a sale. By contrast, he says, American consumers are more tolerant of imperfection and will balance minor defects against price.
Thom McKay, a vice president at RTKL, a Baltimore-baseed architecture firm that has designed more than a dozen overseas shopping centers, says European 7-11 stores were failing until Southland Corp. changed the product mix and presentation to match local tastes.
The best - and, in some cases, the only - way to break into foreign markets is to form an alliance with a local company. Larry Rank, president of Koll Real Estate Group's retail development division for Asia, says foreign retailers in Indonesia must take on a local partner or they are not allowed in. Other countries may be more flexible.
"Each country has different requirements," he says. "The first thing to do is to understand the local requirements. Taiwan doesn't require you to have a local partner, but you would be best advised to take one on. If you come in and neglect to form an alliance, you're exposing yourself to significant risks."
Various kinds of alliances are possible. Kalish reports Levi's and Timberland made their way into Asia by franchising to local entrepreneurs. According to Arthur Andersen Consulting's Food and Consumer Packaged Goods Industry practice, several U.S. retailers including Oshman's sporting goods, Southland Corp. and Robinson's department store formed joint ventures with Ito-Yokado to gain entry to the Japanese market. In Indonesia, says Rank, JCPenney and Wal-Mart established a foreign subsidiary controlled by local interests.
One of the most difficult tasks, says Rank, is finding the right partner. "One of the things we do at Koll is search the marketplace for possible compatible arrangements. It can take time to find the right match, but it's worth the effort," he says.
Most likely to succeed Not all American retail concepts hold promise of foreign success. Observers note that opportunities for department stores, especially high-end ones, and supermarkets are limited because local or regional competitors already control many markets.
On the other hand, specialty retailers, category-killers, manufacturer-label stores and fast-food companies have numerous options.
Europe holds particular promise, says McKay, because inter-European rivalries and hostilities preclude the development of pan-European retailers. "There are few European retailers that can operate in numerous other European countries because they will not be accepted. American companies are not regarded with the same animosity, which often goes back centuries," he notes.
In addition, because American retailers are accustomed to adjusting to differing market conditions, they find it easier to adapt to different nations. "We see a retailer like The Gap that operates just as well in New York as California as Arizona. They don't find the cultural differences from country to country in Europe that hard to deal with," he says.
According to Kalish, Europe has room for many U.S. specialty concepts. "They don't have much there in terms of chains. They have department stores and hypermarkets, but traditional mall stores hardly exist, and they're not developing their own," he says. Kalish also sees opportunities for category-killers in many European markets.
McKay says value-oriented and big-box retailers could do particularly well in Southern Europe, where lower income levels create a high demand for lower-cost merchandise.
Carol Shen, a principal with ELS/Elbasani-Logan Architects in Berkeley, Calif., comments that people in many countries eat out much more frequently than people in the United States. In Singapore, she says, where ELS designed the redevelopment of Clarke Quay (pronounced "key") as a retail and entertainment center, probably 70 percent of the populace eats dinner out because apartments are so small. "As soon as the sun sets, the streets fill with people," she says.
Of course, most Asian countries already have an abundance of places to eat, from fine restaurants to street carts, but as many observers point out, the popularity of American movies and TV shows has given people throughout the world both a familiarity and fondness for anything American.
"Most Asians love American retailing," says Rank. "They know American labels and American [brand] names. Many have visited the United States or have relatives who live here. The names have already been marketed. It's a matter of getting stores opened."
Development opportunities Developers appear to have a more difficult time breaking into foreign markets than do retailers. Most countries have strong developers of their own, often working as an arm of local banks, which gives them a distinct advantage over foreign competition. They are quite capable of handling most kinds of development, at least from a construction perspective, says Rank.
Shen agrees. She says it would be a mistake for American developers - or other professionals - to march into other countries thinking they have know-how that their foreign competitors do not. "I don't think most countries are looking for American expertise. They don't need experts from the U.S. for most things. They know how to do it themselves," she asserts.
Nonetheless, many observers believe there are opportunities. Adrian Owen, director general of Chelverton Properties SA, a Madrid-based developer, notes that Dallas-based Hines Group entered the European market by buying out French developer Groupe Trema, which had built shopping centers in France, Italy and Spain.
McKay suggests that American developers could gain a foothold in Europe by playing on the demand for American retailers.
As with retailers, developers need to pay attention to local patterns and customs. Owen reports that when Australian developer Lend Lease, parent company of ERE Yarmouth, began developing in Europe, it undertook thorough examinations of local markets. "They did numerous research studies, held focus groups, they looked at every part of activity in a shopping center to determine how things worked in a new market," he says.
In Rank's opinion, the greatest area of opportunity lies in consulting rather than development. "Most markets have never experienced modern enclosed malls, so developers don't have the experience with this kind of complex. They want advice and guidance, but they have the development skills."
Shen cautions that even consulting opportunities are limited. "We [ELS] have particular expertise in urban design and linking projects to the surrounding environments, which is why we were brought in on Clarke Quay. But they certainly have talented architects to do most of the work."
GRID/3 International, an interior design firm specializing in retail, has had contracts throughout Latin America but as retail consultants rather than designers, says Keith Kovar, executive vice president of the New York-based company.
"[Latin American developers] have been looking for U.S. expertise in terms of shopping center layout," he explains. "We've introduced concepts such as service corridors, which many of them had not thought of." Kovar attributes the oversight to the relative lack of experience South American architects have in designing large projects.
Opportunities exist for U.S. firms to provide full architectural services. Brennan Beer Gorman/Architects allied with Hong Kong architects Wong Tung & Partners Ltd. to design the 600,000 sq. ft. Plaza Hollywood in Kowloon. The New York-based firm did both exterior and interior design, as well as interior planning and layout.
Developers may not be happy doing business overseas anyway. Those that complain about overregulation in this country could find themselves absolutely apoplectic in most other nations.
"In terms of development, it's becoming increasingly difficult to get planning permission to build anything in most of Europe," says Owen. "When Europe plunged into recession [in the early 1990s], governments in most countries introduced stringent planning controls. You have to get permission from the central government for anything over 20,000 sq. ft., sometimes over 3,000 sq. ft. The projects you see coming through now are those that received permission prior to the recession."
Quite apart from the current economic crisis, the situation for developers in Asia is hardly better. Although governments are generally less concerned with historic preservation and more open to large-scale projects, they nonetheless have reams of red tape.
Land costs are also an issue. Land that sells for $20 per sq. ft. in Dallas would go for $200 to $2,000 per sq. ft. in other countries, Heed points out. If you can even buy it.
"Most of the clients we've run across," says Rank, "aren't interested in selling their property. They recognize the long-term value. Plus it's their country and their ego, if you will, so they're not willing to sell out to foreigners."
Project design Shopping centers take on dramatically different shapes in foreign markets. Suburban-style projects with acres of parking and one to two levels of shops are rare outside North America. Because of land cost and shortage of large sites, vertical malls are more common. "Europe probably has a maximum of two dozen regional malls, where the U.S. has hundreds of them," says McKay.
Kovar reports that GRID/3 is currently working on a 2 million sq. ft. mall, Centro Sambil in downtown Caracas, Venezuela, that rises eight levels. Elsewhere in Central and South America, however, malls tend to follow the American pattern of one to two stories spread over a large site, he says.
Typically, malls and shopping centers outside North America are located in the heart of town, where the level of foot traffic is high and demand for parking is minimal, says Shen. The number of parking spaces per square foot of selling space is usually quite low compared to the United States, she notes.
Europe can be an exception, says McKay, who reports parking requirements in Germany are higher than they are in the United States, despite generally better access to public transportation and closer proximity to residential or business areas. Whatever level of parking is demanded, it is provided almost exclusively in multi-story garages.
Throughout Europe but particularly in London, says McKay, there is a move away from enclosed centers. RTKL designed Centro Oberhausen, a 1 million sq. ft. shopping center outside Dusseldorf. While most of it is enclosed, a significant portion had to be made to resemble a typical German high street to satisfy local expectations.
Center layout in Europe is not significantly different from centers in the United States, but shop sizes typically are smaller, reflecting both local traditions and high rents, according to Heed.
Owen points out that in Southern Europe, supermarkets rather than department stores anchor malls. "People spend one-half of their income on food, compared to one-third in Britain or the United States. A supermarket is much more important than a department store there," he says.
Taking national and regional building styles into account is critical, says McKay. "Design changes from country to country, sometimes perceptibly, sometimes imperceptibly. In some countries, you have several cultures, each with their own style. Spain has three main cultural groups that don't necessarily get along. If you incorporate significant features from one culture into a project in another one, people can get quite upset," he comments.
According to Shen, styles also can be dictated by the level of local skills. Craftsmanship is still strong in some places. Referring to a project ELS is designing in Ismir, Turkey, she says, "The level of craft and quality of design is well beyond anything here. They can do things we haven't been able to do for ages."
Tenants also tend to be concerned with good design in Turkey, she adds. "Usually, you've got to beat your tenants over the head here to get them to do something. Retailers in Turkey are incredibly inventive. They use wonderful furnishings, and there's custom everything," she says.
McKay remarks that most cultures are less convenience-oriented than ours. He uses food shopping as an example, saying, "If I go shopping in this country, it takes an hour. Doing grocery shopping in Europe takes two to three hours. I will have to go to five or six different locations to do my shopping. The notion of convenience is not quite there."
Consumer convenience is also not a priority for many foreign retailers and developers, he adds. "In America, everything is done for convenience and for the consumer. In Europe, everything is done for the producer," he says.
Construction techniques can be different in other countries. Kovar remarks that Latin American contractors rarely use steel framing for large projects, relying completely on poured concrete. "You can end up having a 4-foot-wide column in the middle of your store," he says.
Western Europe Despite Europe's restrictions on building in general and resistance to shopping centers in particular, Centro Oberhausen was able to be built for two reasons.
First, says McKay, the site was a former industrial plant with severe environmental contamination that the government wanted cleaned up and returned to use. Few developers were willing to take on the task, but Britain's Stadium Group, which had developed successful shopping centers in the United Kingdom, accepted the challenge.
Second, the project includes a 24-acre family leisure park and 12,000 sq. ft. multi-purpose arena for local events, uses not economically feasible with other types of development.
Owen and McKay agree that the best development opportunities are town center projects. "Certainly in the U.K., local authorities are eager to give permission to something that will enhance the health and vitality of city centers," says Owen. The drawback for the U.K. and Europe in general, he adds, is a demand that historic buildings - which typically means every building - be retained and restored and local character preserved.
On the other hand, remarks Owen, retailers usually do well in Europe because of higher densities and thus higher traffic counts. "Sales per square foot are generally much higher than in the United States," he says.
Eastern Europe Kalish depicts Eastern Europe as a major disappointment for both developers and retailers. Economic stagnation, resistance to change and recalcitrant bureaucracies have contributed to block advancement, he says.
The population is not all that high anyway, he adds, except for Russia, where a poor economy, official corruption and notorious indifference and inefficiency dissuade all but the most determined American companies from attempting to make a go of it there.
Owen, however, says the market in Eastern Europe simply has not had time to take hold. Over the past two to three years, he says, development has been retailer-led and is happening "very, very quickly."
"There are ample opportunities in Eastern Europe for anyone who's forward-thinking and looking to make money in the future rather than right now," says Owen. "The opportunity is heightened by the lack of any form of modern, efficient retailing, even in high streets [main streets] in city centers."
Middle East This area of the globe holds considerable promise, although investors keep a well-trained eye on political tensions between the Arab world and the West, says Jenefer Greenwood, head of retail for Hillier Parker, a London-based real estate brokerage and consultancy.
"They have relatively large populations and limited shopping options, and are very aware of Western trends. They're very brand-conscious," she says.She says two large entities, Al Shaya and Al Fattain, hold the franchises for virtually all the international brands from Europe and Asia, but adds they are always looking for new brands to franchise.
Greenwood calls Dubai the shopping hub of the Middle East, with some very modern shopping centers. "The market opportunity in the Middle East is going out of Dubai into other parts of the Gulf and over the longer term into Saudi Arabia and North Africa," she says.
Kalish regards the region with less optimism. As he sums it up, "The countries with money have small populations and the countries with large populations have little money."
Asia The sheer size of the population and extraordinary growth of local economies in the past several years made Asia uncommonly attractive. The sometimes staggering tumbles many Asian nations' economies have taken since last fall have drastically altered perceptions. Observers say opportunities still exist but are spread thinly and unevenly.
Even before the current economic situation, most analysts considered Japan an extremely difficult market to break into because of high rents and land costs and the efficiency and power of local retailers.
Nonetheless, says Rank, the Japanese have a certain fascination with American culture and are eager to have high-profile American merchandise.
"The two areas we believe offer the most dramatic opportunities are Taiwan and Japan. North American retailers would most like to get into these markets, and the consumers want them there. The markets are tight, but there is development going on," he says, noting that Koll is currently assisting on five centers in Japan and two in Taiwan.
Koll also is working on the redevelopment of a mall in Hong Kong. The extent to which Hong Kong will remain a potential market is unknown, but given China's aggressive development posture of late, it seems unlikely development will cease.
On the other hand, competition from Asian companies likely will be fierce. China itself is eager to take advantage of Hong Kong's wealth and is paving the way for entrepreneurs from the Chinese mainland to "make it big," according to an article in the March 9 issue of the San Francisco Chronicle. Foreign companies are welcome only when they provide significant benefit to local enterprise, according to the report.
Despite the Chinese government's push to create its own entrepreneurs, Kalish says mainland China looks promising, simply because of its size. "There aren't that many malls there at this point, but they are building them and they seem to be popular. Retailing is modernizing," he says.
To get into China, however, an American company would have to do joint venture. "Selecting the right entity to joint venture with is critical. If you don't choose the right one, it will end up a big mess," he advises.
An emerging market worth noting, says Rank, is Vietnam, which appears anxious to put the past behind it and establish strong ties with the United States. Moreover, it is equally anxious to develop a modern economy and is encouraging development to achieve it. The country has been somewhat less affected by the overall Asian crisis because its economy was not in high gear to begin with.
Rank calls India the dark horse of Asia, although he estimates it will be 10 years before that country is ready for modern retail development. "If you look at Asia and where the least amount of modern retailing is provided, it's India," he says.
Kalish says India requires substantial political and economic reform before it is ready for modern retail development. But with 900 million people, he adds, it's not a market that will remain overlooked for long.
Central and South America According to Kalish, malls are very popular in South America. "The ones I've visited there are always crushed with people," he says. Malls are especially popular in Brazil, he adds, because they are very safe. "There's a lot of crime in Brazil. Developers are liable for safety, so they secure them very well."
Kalish says there is room for more malls on the continent, particularly given the size of the middle class. According to Arthur Andersen, most South American countries - although not most Central American countries - have rapidly growing middle classes. Argentina and Uruguay are mostly middle class.
The consultant reports that economies are growing and inflation has largely been brought under control. For example, Andersen projects inflation in Brazil will run between 6 percent and 7 percent in 1996. This compares to 40 percent and 50 percent a few years ago and 200 percent and 300 percent for brief periods.
Argentina experienced a 4.4 percent growth in GDP last year, while Brazil's GDP grew 3.1 percent. Following several years of solid growth, Colombia has dipped into a trough, with 21 percent unemployment and growing deficits.
Australia With only 18 million people, Australia can hardly be regarded as a lucrative retail market. The country suffered a hard hit from the Asian economic crash, resulting in a 12 percent decline in the value of the Australian dollar last year, according to the Australian Bureau of Statistics. It currently trades at about 66 cents on the American dollar.
The distance to Australia - combined with the distances between major population centers once you get there - makes distribution extremely expensive for American retailers. Shorter hours and lower average incomes provide additional economic disincentives.
According to James Porter, a partner with Altoon + Porter Architects in Los Angeles, only a few American retailers have entered the market. In general, he adds, the country has few chains.
American architects, on the other hand, are in demand because of their expertise in retail design, Porter says.
His firm is working on a new phase of Warringah Mall, Sydney's premier shopping center, and Knox City, a redevelopment in suburban Melbourne that includes expansion of an existing regional mall.
Africa Kalish gives low marks to Africa. Poverty and political instability make it a not especially attractive market, he says.
The exception is South Africa, says Greenwood. This country of 40 million people, despite a certain amount of unrest, is making definite progress. She describes the country as "halfway between Europe and the United States," with American shopping patterns and European tastes.
What makes the market of particular interest, Greenwood says, are "Third World costs but a reasonably large First World population with First World wages."
As with Brazil, shopping centers are becoming increasingly popular in South Africa because of security concerns. Greenwood projects the market will go through a huge growth period in the next 10 to 15 years. She says several local developers have plans for large superregional malls.
Very few foreign retailers have entered the market, she adds, partly because the country developed its own retailers while it was shunned for its policy of apartheid. Opportunities are beginning to open, however.
"One of the interesting trends is everyone is starting to watch American TV," Greenwood says. "They're seeing international brands all the time, and they all want to have these American brands."