Retailers are being forced to re-engineer their legal structures with overseas partners and franchisees following the growth of UK-fulfilled online orders that are impacting their international physical stores. By Glynn Davis
Ahead of speaking at The Retail Bulletin International Expansion Summit 2014 on 25 March, Dr Mark Abell, partner at Bird & Bird, revealed that over the past few years one of the busiest areas for his firm has involved the re-assessment of legal arrangements between UK merchants and their overseas partners.
“Many of these agreements were for 20 to 30 years and some retailers have simply said to their partners: ‘you’ve done a great job with the stores but we’re now opening up shop online.’ The local partners clearly don’t think this is a great idea!” he explains.
This highlights just how complex and flexible such legal structures need to be in order to take into account future changes in circumstances. Ideally the original arrangements that retailers put in place with partners when venturing overseas should be handled by expert advisors to avoid unforeseen issues.
“Retailers often have their in-house lawyers do it but they do not know about international markets,” says Abell, adding that often retailers do not realise they have made mistakes with their legals until some years later.
Such scenarios are becoming increasingly common because of the ongoing desire by retailers to expand overseas in order to move beyond the stagnant domestic market. But Abell says merchants are faced with problems from the start when going international because they are both under-resourced in terms of management capabilities and also “strapped for cash”.
On top of this there is the massive obstacle of all markets being very different: “Retail expertise in the UK is not easily transferrable to even Germany let alone places like India, China and Iran.”
The issues centre on three aspects. Firstly, there is the need to recognise what consumers want – in terms of the product mix – because this invariably differs in each market. It might be down to taste but also to differences in physical sizes of people.
Secondly, there is the need to understand how the customer wants the product. This can involve presentation, service, and layout. The reality is that shopping in say Japan is totally different to that in the UK. How to handle online sales in each country also has to also be considered today.
Thirdly, the restrictions in each country also have to be dealt with. In Germany for instance the employment laws and access to real estate are very different to the UK. There are also the issues involving direct foreign investment regulations and protection of the brand.
The answer to the first two can be dealt with through the choice of market entry. Abell recommends linking up with a local partner. But whereas this has traditionally been through franchise arrangements he says UK retailers have been looking at other alternatives in recent years.
“As they look to drive extra income streams – not just a cut of the sales of products from franchisees – we’re now seeing more complex and appropriate structures with overseas partners. More and more UK retailers are taking a slice of equity [in the overseas business] through a subordinated equity arrangement,” he explains.
Setting up such arrangements can be complex and as such specialist expertise should be sought if retailers are to take full advantage of their overseas expansion.
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This article first appeared in the Retail Bulletin