Do your homework
In this highly competitive business environment, extensive research and an understanding of the culture are essential.
If the families living in California thought the request from the market research company unusual, they did not say. Fifty people from Britain wanted to live the 'American dream' for a fortnight. They planned to shop, eat and chill out with the families, keeping diaries that detailed the minutiae of their hosts' lives. The 50, though their hosts were not aware of it, were senior directors and researchers from Tesco, the UK supermarket chain that takes more than £1 ($2) out of every £8 that goes through the nation's tills. The researchers' findings were reported back to Tesco's CEO, Sir Terry Leahy.
In February 2006, after two years of intensive research, Tesco unveiled plans for a £250 million ($500 million) assault on the US market with the opening later this year of 20 Fresh & Easy Neighbourhood Market stores in and around Phoenix, Arizona. Other outlets in Los Angeles and San Diego are expected to open at a later date. Tim Mason, Leahy's right-hand man and credited with the phenomenal success of Tesco Clubcard, has moved to America to spearhead the attack.
"We always research our markets before entry, but this is the most extensive research that we have ever done," explains Greg Sage, spokesman for Tesco's US operations. "All markets are different and there is a wide range of retailers in America. We have identified a format that we don't think currently exists." Tesco is yet to unveil its unique format and is coy about revealing details, but experts believe it will straddle a Trader Joe's convenience store, a local institution offering distinctive food products at reasonable prices, and a cheaper version of organic food shop Whole Markets.
To protect its competitive advantage, Tesco's research was conducted entirely undercover. The supermarket chain even constructed a dummy store within a warehouse, inviting 250 focus groups to tour and offer feedback. The unsuspecting shoppers were told it was a film set. Even some local researchers were unaware of the identity of their employer.
Based on the research, Tesco decided that it should go it alone rather than seek a joint venture partner. "The concept didn't exist, so we decided to start from scratch," explains Sage. "We have started in the west because you have got to start somewhere and that is an area where people lead busy lives, but don't really have food supplied to them in the way we envisage."
The stores, which will be at least three times bigger than a Tesco Express in the UK, are designed to draw customers back to their local neighbourhood by offering high-quality, fresh and nutritious food. Allyson Stewart-Allen, founder of International Marketing Partners, which advises overseas companies on entering the US marketplace, applauds Tesco for its work. She believes research is vital for any company considering an American adventure. "There are many things to consider," she says. "For example, some overseas companies make the assumption that the US market is very much like their home markets when everything is different - tastes, lifestyle, income, preferences, socio-demographics.
"There are also the cultural differences. American consumers like to be sold to. They like stories around products, so someone such as James Dyson and his vacuum cleaner has done well because it is about an inventor fighting the major companies. Finally, there is the scale: can overseas companies cope with the demand that might be generated? European companies often tip-toe into the US market and have a very tentative approach," says Stewart-Allen.
Charles Smallbone, founder of bespoke kitchen-maker Smallbone of Devizes, adds: "People underestimate the scale of the marketplace. Getting a product from New York to Los Angeles is not the same as getting a product from London to Edinburgh. It is not like having shops in London, Manchester and Brighton, and describing your company as nationwide. The logistics are immense."
The most common mistake overseas companies make is to view the US as a homogenous marketplace. Although the 50 states have different legal frameworks, there are really five regions - north-west, south-west, mid-west, north-east and south-east. Stewart-Allen says: "Getting their head around those points of entry is really the key for any company considering the US market. The differences across neighbouring states may, in some cases, be minimal, but the differences across regions are huge. The diversity in America is huge, and the smart thing to do is to draw a map on to your client bases and try to look like them."
Gordon Power, a retired entrepreneur who moved to New York in 1999 to launch a private equity fund, agrees. "America can be a very class-orientated society," he says. "It can put you in a box. I was the most experienced member of my team and had the track record, but I always chose the member who would present better to the audience, be it pro-Christian, pro-Jewish or pro-Muslim. The company also had memberships of Jewish, Christian and black-only golf clubs." When it was looking for an investment from the City of Detroit pension fund, the company hired a black sportsman to lobby the trustees.
Cultural differences have been blamed for many of the difficulties suffered by DaimlerChrysler, the car giant created by the 1998 $36 billion merger of Germany's Daimler-Benz and the Chrysler Corporation. It was then the biggest industrial merger in history, but in recent months the company has announced its intention to split. "There were lots of similarities on the engineering side, but when it came to the cultures it just didn't fit together. The Germans just didn't understand the marketplace," explains one insider. "It really was a case of Wide Boy American versus Mr Staid German. The German bosses may have been familiar with New York, but they certainly did not understand Detroit (home of Chrysler) and middle America. Ironically, although Stuttgart (home of Daimler) is a car city, it is also seen in Germany as a privileged place to live. Detroit was another world to the Germans."
With the benefit of hindsight, it is now apparent that Daimler-Benz failed to conduct adequate research on either the US marketplace or the company it was acquiring. "It merged a company with a low price-earnings ratio, Chrysler, with a company with a high price-earnings ratio, Daimler, and thought it would trade in the middle. That never happened," says one banker. "Daimler also thought that because it was merging with an iconic company, US shareholders would buy shares in the entity. But the US investors understood the simple American story; they didn't understand the German/global one."
The German car company also failed to understand the power of the trade unions in the US. Although unions are influential in Germany, it is believed that the far-reaching power of the United Auto Workers (UAW) union surprised even the Stuttgart stewards. The US union has board representation and because it can promise large memberships is influential in political decision-making processes. The company is in talks with the union regarding the Chrysler pension fund deficit and its liabilities towards employees' future healthcare costs, which some estimates say could tip $50 billion.
"Foreign companies, particularly British ones, can really underestimate the power of the unions," observes one lawyer. "They think there's a Margaret Thatcher character coming along who will eventually sort them out. But this is America. Unions play an important role in the election process and no political party is going to try to rein them in."
However, 22 states, including Alabama, Mississippi, Texas and Virginia, have declared themselves right-to-work states. An employee has the right to work for a company that has a union without being required to join that union. Such moves have proved attractive to foreign firms: several Japanese car manufacturers, including Toyota and Honda, chose to build their assembly plants in right-to-work states.
Tesco is launching its American dream in a right-to-work state, Arizona, but there are signs that the United Food and Commercial Workers Union (UFCW) is unhappy at its decision to employ non-unionised staff. Health First, ostensibly a group of citizens concerned about air quality, asked the courts to block the construction of Tesco's distribution centre in Riverside, California. Lawyers representing the case are closely associated with the UFCW, and Health First appears to have been founded solely for the purpose of battling Tesco.
Flyers protesting against the company's applications for licences to sell alcohol, which claim Tesco has been selling alcohol to underage customers in the UK, have also been funded by the union and distributed in Phoenix. Union spokesman Mike Vespoli has publicly stated that if Tesco will not recognise the "rights of the workers to organise", then "we're going to be there to challenge every step of the way".
On a more micro level, the problems facing foreign companies entering the US market can be just as time-consuming. Rhian Chilcott, head of the Confederation of British Industry's (CBI) bureau in Washington, says: "If you get a group of ex-pat businessmen together in a room, you can guarantee there will be two topics of conversation - how long did it take to get a driving licence and how long did it take to get a credit card."
Power agrees. "The simplest things can become extremely difficult," he says. "Just getting utilities or a local telephone line can be impossible without a National Security number and nobody really tells you that until you're on the ground."
It is relatively straightforward to set up a company in the US. Every company must be incorporated and registered with the Secretary of State, division of corporates, which will also check the name, as no two corporates may share the same name. Delaware is a particularly popular destination for foreign companies seeking incorporation. Robert Ripin, partner at law firm Lovells in New York, explains: "Delaware has a long history of a flexible and liberal corporate law. The courts have also interpreted the law, so there is greater certainty and understanding of any judicial decision."
Companies do not need to be resident in Delaware to incorporate, although they will need to pay an annual franchise fee. But the choice of state to locate a business is an important one for other reasons. There are very different tax regimes to consider; for example, the state tax in New York is considerably higher than those of the neighbouring states of Connecticut and New Jersey (Anglo-Dutch Unilever has its US headquarters in New Jersey). Similarly, Virginia has a more attractive tax regime than neighbouring Washington DC.
Most relocation experts recommend that foreign companies entering the US market should employ a local tax adviser. Many states will also offer tax concessions to special industries or businesses to locate within their boundaries. Smallbone of Devizes has recently been offered a special relocation package by the state of Virginia to move its manufacturing base and headquarters from Connecticut. "It is a very tempting offer," says Smallbone. "Virginia is offering capital allowances to assist with the establishment of a new plant and help on the recruitment side with new staff."
The British-American Business Association offers advice and assistance to UK companies looking to establish a presence in the US marketplace. It has a regular supply of American companies looking for a British partner, and also provides intelligence on the marketplace. "If a jewellery maker in Wolverhampton wanted to sell in the US, then for a nominal fee the British-American Business Association would conduct research for it and offer advice on potential locations or partners," explains the CBI's Chilcott. Most US states also have an economic development agency that offers advice and guidance to foreign companies looking to build a business in America.
One aspect of US business life that many foreign companies are unfamiliar with, and hence ignore, is the lobbying process. Lobbying on Capitol Hill, the epicentre of American political power, is really necessary only for market leaders. Insiders at DaimlerChrysler concede that the German side of the company had not anticipated the cost and time needed to lobby the federal authorities.
Stewart-Allen says: "If you are not a market leader, you may still need to lobby both the state and city legislators. I imagine Tesco is lobbying the state, city and local council to get approvals, which is probably costing it a lot of money."
Chilcott says: "You do need to have a relationship with the local government if you want it to grant business or other licences. It is all about establishing a relationship with the government and presenting yourself as a good corporate citizen. It should mark the start of building good relationships with local stakeholders."
But despite all the difficulties, most foreign companies believe that opening an office or acquiring a competitor in the US can prove invaluable. "Over the course of 15 months, I probably spent $1 million trying to set up a small private equity fund," says Power. "But having a US operation opened so many doors because other investors understood the time and effort it had taken, and took the company more seriously because of that. So if you ask me if it was worth it, the only possible answer is: absolutely." Tesco's Fresh and Easy stores in Phoenix, Arizona, will be designed to draw customers back to their local neighbourhood.