Is it rational to go international? For more and more American retailers and investors, that question is being answered with an emphatic “yes,” as U.S. firms continue to export the nation's shopping culture to foreign shores in unprecedented waves.

While offshore retailing may sound sexy, it can be fraught with high taxes, geopolitical risks and confounding bureaucracies. However, it also holds unlimited opportunity for companies armed with strong plans and brands, and an alliance of local partners to navigate them through international channels, say shopping center developers and retail consultants.

But tread lightly. “You can't be the ugly American going in and think you're going to conquer real estate,” says Richard Muhlebach, who has taught real estate internationally for the Institute of Real Estate Management and is a senior managing director with real estate services firm Kennedy Wilson Inc.

Overcoming Cultural Barriers

Despite the challenges, U.S. developers continue to make a splash in international waters. Mills Corp.'s first offshore venture, the 1.4 million sq. ft. Madrid Xanadú, opened in 2003 and is now 97% occupied. A joint venture between Mills and Parcelatoria de Gonzalo Chacόn (PGS), the shopping/entertainment center features an indoor “Snow Dome” ski facility and one of Spain's premier department stores, El Corte Ingles, as well as Hipercor, Neverland and Nike, among 220 shops.

Partner PGS, a Spanish real estate developer founded in 1946 and initial owner of the Madrid Xanadú land, handled all the urban planning and local licensing and is majority owner of the company that manages the property, Parque de Nieve Madrid.

Such alliances are crucial, says Ed Vinson, Mills' executive vice president and managing director of international development. “We knew we had to get somebody local who was well-positioned. You really have to become a part of the fabric.” Because of local partners, Xanadú opened on time, a rarity for U.S.-led projects in Europe, according to Vinson.

Though English is considered the language of business, most regional government representatives in Spain don't speak it, says Vinson. Mills sometimes uses an interpreter, “but in reality, you have to have team members with language capabilities.”

Projects in Europe often need the approval of both regional and local planning departments, and those entities often don't see eye to eye, he says. Developers shouldn't think they can just tote their U.S. tenants overseas and succeed, Vinson says. “We didn't bring any that weren't already in Europe. We found that Spaniards are reticent to embrace new retail concepts.” In fact, retailers that Mills imported from elsewhere in Europe were slower to catch on than regional ones, he notes.

Chelsea Property Group, a Roseland, N.J.-based developer specializing in outlet centers, is building its fourth retail center in Japan in partnership with Mitsubishi Estate Co. and Nissho Iwai Corp. Chelsea entered Japan in 1999. The real estate investment trust (REIT) also is building an outlet center in Mexico City, Premium Outlets de Mexico, a joint venture with Sordo Madaleno y Asociados, slated for completion in 2004.

Les Chao, president of Chelsea, says finding trustworthy partners in both countries to wade through land entitlements, taxes and other issues “took years. But that's always job No. 1.”

In addition, developers must bring something unique to the table internationally. “Outlet shopping didn't exist in Japan until we came along,” says Chao. “Having proprietary knowledge and filling a narrow niche are preferable.” About half of the stores in the Japanese centers are domestic chains that outsell internationally prominent retailers, he says.

And expect much higher taxes internationally and adjust return expectations accordingly, he advises. “We'll get a 13% to 14% (unleveraged) return on assets in the U.S., but on overseas projects, we want to go north of 20%.” He expects returns on assets in Mexico to be in the upper teens.

An Expanding List of Players

For many U.S. chains and some developers, international has ceased being an “if” proposition. Needing fertile ground for their requisite 5%-plus annual growth, they seek cross-border opportunities. “The Costcos and Wal-Marts have covered the U.S. and are venturing overseas,” says Ian Thomas of Vancouver-based Thomas Consulting.

Wal-Mart, which did not have any international stores in early 1991, now has 1,300 such locales, and will add 140 in 2004. Gap's international division has hired a new president, Andrew Rolfe, to add to its 500 international units, while Home Depot has identified expansion opportunities in Europe and Asia.

“It's a growing roster,” says Neil Stern, senior partner at McMillan Doolittle, a Chicago-based retail consultant. “It's mostly driven by the challenge of how to survive with U.S. markets maturing.” That maturation is evident in American retailer saturation. Retailers will occupy just under 6 billion sq. ft. of U.S. shopping center space by year-end 2004, up from 5.46 billion sq. ft. in 1999, according to the International Council of Shopping Centers.

A Different Set of Challenges

The American penchant for title insurance, which guards against ownership and property defects, is catching on overseas, says attorney Evan Lazar with the European property and finance group of Weil, Gotshal & Manges. The international firm recently handled title work for U.S.-based Stewart International on a $104 million purchase of four retail properties near Prague, Czech Republic.

But other deal-making differences remain. Americans commonly churn out detailed 75-page leases, “but in most European countries, it's rare to see more than a 10-page lease,” he says. “Some even have length limitations.” While U.S. developers typically own centers they develop, “centers in France are set up condo style, where anchor tenants own their spaces and have the say-so on other tenants.”

Sometimes, the players all have different nationalities, Lavar says. “On one project, the developer was from England, the lender from Germany, the construction company from Austria, the anchor tenant from France, the project was in the Czech Republic and the junior anchors from the United States.”

In Europe, be ready to encounter a different work ethic, advises Faith Hope Consolo, vice chairman of Garrick-Aug Worldwide. “They move slowly and work less hours. They have the compulsory four-week vacations. (The mindset) can be frustrating for some because it doesn't fit into the American pro forma.” All told, expect international projects to take two to three times as long as here in the U.S., she says.

International shopping centers are smaller, with two to four anchors, and are roughly at the stage American shopping centers were in the 1980s, Muhlebach says. “That's not so bad. That's about the size of a lifestyle center, which is what's getting built here.”

Geopolitics pose additional risks. Starbucks, which has more than 1,500 coffeehouses in 31 markets outside North America, was boycotted by anti-war protesters in Lebanon. McDonald's was targeted in South Korea, Ecuador and elsewhere.

Other harsh lessons: When Costco took its bulk-commodities model to the United Kingdom, it didn't fully account for the country's lack of freezers and storage space and had to repackage its products, says Thomas. Build-a-Bear wanted to expand internationally “but because the concept is so successful, management found they had been knocked off with poor clones.” International copyright laws don't facilitate quick redress, Muhlebach adds.

Opportunities, Caveats

Some of the best emerging opportunities lie in Poland, Hungary and the Czech Republic, Consolo says. “They want everything and they need everything, from supermarkets to toy stores. If a developer sets a platform, they can do well.”

Eastern Block development is more predictable than still-unstable South America and Latin America, where franchise agreements with local owner/operators are a must to buffer risks, according to Consolo. And Russia “loves Versace and Armani and beauty products, but is still a gamble because you never know who's in charge.”

In countries such as Russia and China, where only a small segment of the population can afford shopping-center prices, brand image can sustain traffic, says Thomas. “For companies like Starbucks, which does not so much sell product as it does lifestyle, everybody wants to be seen carrying those cups. In Russia, where it costs about a day's wage to buy a Big Mac, people still love that indulgence.”

Don't overlook North America, says Stern. “A lot of retailers have gone south to Mexico rather than go overseas. You don't have the wealth, but you have huge population areas like Monterey,” with approximately 3 million people in a country of more than 100 million. As for Canada, “You don't see the diversity of wealth, but it's easier to do business there.”

Europe was projected to see the most retail construction in its history in 2003 at 4 million square meters, up appreciably from 2.92 million square meters in 2002, according to Cushman & Wakefield- Healey & Baker.

But numerous opportunities remain there, particularly in the U.K., Italy and France, says Consolo. “The U.K. is a very safe environment. It's slow to accept newcomers, but once you're entrenched, it's easy to expand.” She believes that the strong Euro has enabled European stores and investors to expand more effectively outside of their home countries.

In more socialistic countries such as France and Germany, a higher percentage of retail investment goes to worker benefits, says James Goodnow, professor of international business at Bradley University in Peoria, Ill. Goodnow expects to see record levels of international business activity in 2004. “With the value of the Euro projected to grow against the U.S. dollar, “it's a good time to go to Europe and sell.”

Not for Everyone

So why aren't practically all American retailers making a play overseas? “The U.S. is a big market and many American retailers are happy serving that,” says John Stanley of John Stanley Associates, an international retail consultant based in Kalamunda, Australia. “Moving into new markets and understanding new cultures takes time.”

While dozens of American retailers and investors have successfully expanded internationally, the sheer complexity of the undertaking will keep others at bay as long as there is room for domestic growth in the U.S. and Canada, say Stanley and other industry experts.

Before venturing overseas, “do your homework,” says Stanley. “It's more than getting the package correct. Many businesses spend money on the look and forget to invest in the team to make it work.”

Assume a student's mentality in a new land, he adds. “The biggest challenge to American retailers who wish to develop the overseas market is cultural, not legal. The key to success is understanding the cultural needs of the society.” Carefully seek out scrupulous local partners and tread cautiously, Stanley also advises.

As Consolo says, “International retail is not for the impatient, the weak or the underfinanced.”

Steve McLinden is an Arlington, Texas-based writer.