As the world's richest nation, the US has always generated an irresistible attraction to corporations. With 300 million potential customers, a quarter of the world's GDP and an annual consumer expenditure of more than $8 trillion, it is little wonder so many have been lured by its potential. Yet, success in America has eluded many firms and cost much money, sweat and tears.
The US market is hyper-competitive, combative and very mature. It is very fragmented, ethnically and socio-economically. The population is also relatively spread out, with strong regional differences between east coast, west coast and the mid-west. The country also has its quirks - a tough regulatory background, demanding accounting standards, interfering politicians, chronically litigious parties, maddening visa policies and impossibly complex banking and tax systems.
Obvious as it sounds, the first question corporations should ask is whether the US is the right market for them. Alan Rugman, professor of international business at the University of Indiana, argues that most global companies are in fact regional powers in the sense that they make most of their sales in their home region. "You can be a world-class company by performing well in your home region. Often the liability of going global generates risk costs that outweigh the benefit of expanding," he says.
In other words, the US is not for everyone. More specifically, Rugman argues that there are only two sectors where a presence in America is a prerequisite for success: the pharmaceutical industry and financial services. In the US, European pharmas get access to invaluable R&D and a very lucrative market. As for financial institutions, London may rival New York as the capital of finance, but the US remains the financial powerhouse of the world economy.
For those companies that do decide to tackle the US market, investing time and effort into a sound strategy is a key to success. Bruce McKern, senior lecturer in international business at Stanford Graduate School of Business, says that companies should think about their core strengths, how they can market them and how they would fit into the market. "When you're in a market that is very mature such as America, growth rates are much more modest than in China, for instance," he says. "So you cannot expect to find new market space, and when you find a niche, you have to fight for it."
Chinese consumer electronics manufacturer Haier is a case in point. Created in 1984, it produces a large range of appliances, from refrigerators to plasma screens to air-conditioning units. It is now market leader in white goods in China and the fifth biggest producer of white goods in the world, selling its products in more than 100 countries. The company started exporting to the US in the mid 1990s, but in 1999 it decided to open facilities in the US to cater specifically for the US market. A manufacturing plant was opened in South Carolina, followed by a design centre in Boston and an HQ in New York.
Haier's strategy in the US has been one of low costs and low prices. By taking advantage of the cheap labour in its home country and the relatively inexpensive cost of shipping, it has been able to target price-sensitive segments of the market, such as air-conditioning units and compact fridges. This strategy has stood it in good stead: the company now has a 26% share of the US market for compact refrigerators (used in college dormitories and hotel rooms).
Haier started working very early on with major US retailers and secured good distribution deals with Wal-Mart, Home Depot and Best Buy. Michael Schaefer, research analyst at Euromonitor, says that these relationships were crucial for Haier. Not only did they give the products the shelf space it needed to establish a good market presence, they also gave it credibility. Schaefer says that this enviable position has allowed Haier to innovate at the low end of the market, such as using better quality stainless steel finishes or developing new products, such as the wine cooler segment where it now holds a 50% market share.
The company is now hoping to move to the higher end of the market, but the trouble is that competition at this level is more about quality than price. Haier could rely on unbeatable prices to sell $40 microwaves. Brand recognition, however, is what it will need to sell $2,000 fridges. This is where the design centre and manufacturing facilities come into play. "For products to sell, the design has to be done in a wealthy market," says Rugman. "The last thing you want is for them to look like clunky Chinese washing machines."
In an article in the November issue of Far Eastern Economic Review, Haier's chairman, Zhang Ruimin, wrote that Chinese companies were struggling internationally: "Chinese enterprises are hard-pressed to create a culture of innovation. The atmosphere of the market can be described as 'success in the domestic market, failure in the global market'."
The issue of branding is a serious concern for Chinese companies. Josef Blumenfeld, founder of Tradewind Strategies, a consultancy that helps overseas companies break into the US market, says that all Chinese companies tend to be lumped together under the collective brand name 'Made in China', a tag that generally denotes poor quality. But he points out that Japanese and Korean firms experienced similar prejudices when they first entered the US market. Samsung and LG are now giving Whirlpool and Motorola a run for their money, while Honda and Toyota are doing as well, if not better, than their American rivals.
One company that has suffered from branding issues is Mexican baker Grupo Bimbo. Bimbo products have been a staple of Latin American households for more than 60 years. In the 1980s, the company decided to start selling in the US, reckoning that with 30 million Hispanics, the potential for growth was strong. But Bimbo products found their way only into Mexican shops. The combination of a Latino brand with a dubious sounding name did little to boost their appeal among the general American public. Grupo Bimbo therefore had to approach the issue differently.
In 1998, the opportunity came up. It acquired Mrs Baird's, one of America's best-known bakery chains, and set up Bimbo Bakeries USA (BBU). It also acquired Oroweat, Entenmann's and Thomas', all leading US brand names. Former CEO John Muldoon later commented that the decision to buy rather than build had been instrumental in turning the company round.
McKern says that acquisition strategies are an excellent way of breaking into a new market. They can accelerate a company's capacity to achieve critical mass and gain access to customers, and can also be a great source of information about the market. Chinese computer company Lenovo, for instance, bought IBM's PC business, and one of the reasons Haier was so keen to acquire Maytag was to learn from its competitor.
Acquiring household names can also give the acquirer the necessary breathing space to let their own products grow. BBU, for instance, worked on private labels and has recently gone into food services. It is now the main baked goods supplier of restaurant chain Olive Garden. BBU also worked hard on catering specifically for the US market. Monica Feldman, an analyst at Euromonitor, says that BBU has a strong track record of adapting to consumer trends; for instance, when the Atkins Diet was popular, it worked on low-carbohydrate breads. Recently, the company removed all unhealthy fats from its products and introduced more wholegrain and seeds.
BBU is now present in 27 US states, mainly in regions with a strong Hispanic population. Its acquisitions have allowed it to grow in the mid-west, but its market share remains small in the eastern half of the country. It is an illustration of the extent to which geography is an issue. Gerald Gordon, president of Fairfax County Economic Development Authority, an organisation promoting the Virginia county worldwide (see box), says that his clients tend to think of the US as a homogenous market. "But I often say that our most foreign office is in California. It's a different world over there. In a way, Frankfurt and London are more similar to us," he comments.
What tends to happen is that an area of the country turns into a regional sphere of influence. Asian companies go for the west coast, European firms go for the east coast and Latin American companies often start in Latino strongholds such as Florida, Texas or California. The rationale is one of proximity and cultural affinities.
But choosing a specific area to launch one's operations can also be a strategic choice. UK grocer Tesco is an example: the firm announced in February last year that it intended to enter the US market through the development of a new convenience format on the west coast, and would invest £250 million a year in the development. So why the west coast?
The retail grocery and consumables market is perhaps one of the most concentrated in the US, with Wal-Mart controlling nearly 20%, according to Euromonitor. But Wal-Mart does not have the presence in California that it does in other states, which gives Tesco the opportunity to launch without competing head on with it. Tesco's new format is also likely to fit the demographics of the west coast: based on its highly successful Express model in the UK, the new convenience stores will cater for on-the-go urbanites with a high disposable income.
Martin White, research director at AMR Research, says that Tesco has been thinking about this move for years and has learnt a lot from previous partnerships with Safeway in the San Francisco Bay area and Kroger in the mid-west. "Tesco's move to America is a question of timing and finding the right proposition," he says. "Tesco is very consumer-driven, whereas the US is more of a push market."
In a market where retailers look increasingly similar and where suppliers dictate what goes on the shelves, White reckons that Tesco has the potential to carve out a new position and break the mould of US retailers. The supermarket chain is now present in 12 countries: Taiwan and France are two countries that have resisted the Tesco mania, the latter because of poor branding, the former because of the lack of real estate. By starting small - analysts reckon that the company's investment will fund about 100 shops - Tesco is giving itself a margin for error. And by keeping it quiet, it is also controlling market expectations and fuelling competitors' frustration.
White says it's too early to tell whether Tesco will expand further, but he thinks that the grocer has luck on its side, including the appointment of new US chief executive Tim Mason. Mason has all the right credentials to succeed, having held several marketing positions over the course of his 25-year career at Tesco. Rugman is more sceptical. Retail, he argues, is a local business, and the US is a particularly hard sell because of the level of competition.
Other analysts point out that not selling fuel might be a mistake since convenience store/petrol stations generally attract a lot of business. Tesco's lean logistics might also be harder to apply in a vast country and where population density is much lower than in the UK. There is also no guarantee that its Clubcard scheme will take off in the same way (see box).
Perhaps the one thing that all these companies have in common is the fact that they all tailored their approach to the US market. Rugman says that underestimating the uniqueness of new markets is possibly the biggest mistake a company can make. "You cannot have the arrogance to assume that you'll be able to use the same business model everywhere," he says, even if it is just a case of tweaking foreign design to American preferences. This is also the reason why he thinks that the US market might be difficult for companies such as Tesco and Haier.
Blumenfeld also says that Asian, and particularly Chinese, companies struggle with the concept of marketing and fail to grasp the degree of sophistication of US consumers. He mentions a recent incident when a Chinese car manufacturer received a bad review in a consumer magazine. When asked what he thought about the critique, the CEO replied that he hadn't asked the magazine to review the car. "The Chinese are a mass market; it's a more natural fit for them to sell to the mass rather than the high end, where consumers are more discerning," says Blumenfeld.
The US market is undoubtedly demanding, but it is also rewarding. Most experts agree that if the product or service is good, consumers will buy it, regardless of its origins.
The Fairfax County Economic Development Authority in Virginia offers its clients a list of five golden rules when considering an expansion into the US:
1. Take your time to prepare your move. This includes market research, product and service design, initial investment plans.
2. Choose your US location carefully. Considerations should include talent pool, living environment, proximity to home country, presence of potential partners/customers/suppliers.
3. Start working on your business and private banking needs early. It can take months to get a bank account in the US - start working with US banks in your home country and ask them to write a referral letter to their US counterpart.
4. Arrange legal and accounting requirements in advance. Contracts, visa requirements and all admin should be dealt with by experienced US professionals.
5. Identify suitable office space. Office space can be very expensive and hard to come by - allow sufficient time and money to find it.
COMPANY SALES BY REGION
UK 76%, Europe 13%, Asia 11%
China 85%, rest of world 15%
Mexico 69%, US 24%, Latin America 7%
Source: Tesco, Euromonitor, BBU
WILL TESCO'S CLUBCARD WORK IN THE US?
Tesco's phenomenal success in the UK has been scrutinised by many analysts, all of whom have come up with various explanations, from lean logistics to adaptable business models. But according to Mike Tattersall, analyst at JPMorgan Cazenove, it is Tesco's loyalty card that has earned the grocer its retail supremacy.
The company responsible for this success is number-crunching consultancy dunnhumby. Dunnhumby's feat was to use the huge amount of data generated by the Clubcard to tune into customer shopping habits. The results of its research determines which products Tesco decides to add to its range or what introductory offers would lure customers into buying new products.
But the supermarket chain has been careful about rolling out its card scheme internationally. Consumer habits are different and customers don't respond to the same incentives. "I think Clubcard will follow us round the world, but it's a question of timing," said Tesco CEO Tim Mason in the latest edition of Scoring Points by Clive Humby, Terry Hunt and Tim Phillips (2006 Kogan Page).
Its achievements, however, have not gone unnoticed abroad. Kroger in the US recently hired dunnhumby to help it sort out its own loyalty card. The partnership is in its early stages, but since Tesco owns 84% of dunnhumby, Martin White, research director at AMR Research, says it will be interesting to see whether Tesco allows it to carry on now that it is targeting the US. Whether and when Clubcard will get to the US is therefore anyone's guess.