EU Retail News - May 2017
Talking Business: How to Get the Most Out of Joint Ventures
Author: Carol Osborne
Fashion is all about making the old new again, and the well-established concept of a joint venture as a mechanism to extend a brand’s global reach is currently on trend explains Carol Osborne.
What is new about the latest retail joint ventures is the pairing of high street with luxury brands. H&M has been very successful in partnering with high fashion labels such as Alexander Wang, Jimmy Choo and Versace in a bid to bring luxury into its high street stores: long queues of young customers at every launch event are a testament to the success of the strategy.
In the latest example, perfume giant Coty Inc has announced it is entering into a strategic partnership with Burberry that includes a long-term licence of Burberry’s brand for cosmetics and fragrance, and the acquisition of the assets of Burberry’s existing beauty business. This new deal for Coty adds Burberry to Coty’s existing stable of luxury brands including Gucci, Alexander McQueen, Marc Jacobs, Calvin Klein and Hugo Boss.
The advantages of a joint venture or strategic partnership for a luxury brand are threefold. First, the luxury brand is able to expand its name and reputation beyond its original core product line into new and usually very differentiated products at a variety of price points. For all luxury brands, attracting younger customers who will become loyal purchasers is a critical part of their long-term growth strategy. However, younger customers usually require lower price points. A joint venture that can expand a luxury brand’s reach into the high street without sacrificing brand identity is an ideal solution.
The second benefit is that the luxury brand can accomplish brand expansion and younger customer engagement without suffering the associated distractions for its design team and management. A joint venture can also shift the burden of investing in a new business line from the luxury brand’s own balance sheet to that of the strategic partner, or to a new joint venture entity.
Finally, unlike a pure licensing arrangement, joint ventures typically include deeper oversight or control over design and product development – there is collaboration between the luxury brand’s design team and the joint venture partner.
"Both parties share in the benefit of growth, but also share the risk of failure"
There is no single formula for a joint venture or strategic partnership, and the arrangements can be highly customised but, broadly, there are two approaches. In its purest form, a joint venture would involve both parties contributing some aspect of their own business to a newly created joint venture entity, wherein both parties own a share and exercise control over those aspects of the business most aligned with their own strengths.
Because both parties are owners of the business, they share in the benefit of its growth, but also share the risk of failure. The principal advantages for a luxury brand in using an entirely new joint venture vehicle are the high degree of control that it gives the brand, as well as the opportunity to share in more of the upside growth of the business than might ordinarily be achieved with royalties under a license deal. The downside, however, is that the brand still needs to find the management talent to run the new business venture and may often need to find financing for the new venture as well.
The alternative is for both parties to the strategic partnership to keep their businesses entirely separate and use contractual agreements and long-term licences to create mutually beneficial outcomes. In these circumstances, the luxury brand will primarily be licensing its brand to the strategic partner in exchange for a royalty and perhaps an additional share of the profits, while the strategic partner shoulders most of the burden for manufacturing, marketing and distribution of the products developed under licence.
Getting it right
There are several issues to address before embarking on a joint venture – regardless of the form it takes. The most critical of these is the selection of the right joint venture partner: one who can bring the right skills and experience. For Burberry, for example, Coty offered several important credentials: a shared focus on innovation, a history of successfully developing luxury products, a well-regarded expertise in beauty and fragrance, and the global reach needed for both product development and distribution.
"Clear governance rules allow the parties to quickly identify and resolve business issues"
The second issue is reaching a mutual understanding on how key decisions relevant to the business are going to be made and by whom. Clear governance rules for the business of the joint venture can allow the parties to quickly identify and resolve business issues – from design decisions to selection of new markets – and will also hopefully avoid misunderstandings or disagreements.
The third issue may be the hardest to confront when the parties are enthusiastic about their new venture: how to manage the end of the relationship. Joint ventures can fail on a number of levels – financially, strategically and operationally – and it is a sobering truth that most joint ventures or strategic partnerships fail.
Nonetheless, joint ventures are on trend for a reason and with careful selection, good governance and forethought, the benefits are tangible. The latest example of Coty and Burberry finding a better way to bring beauty to the market will not be the last.
British Retail Consortium Weighs in on Preferred Brexit Journey for Retailers and Consumers
Author: Nicola Conway
In April 2017, the British Retail Consortium ("BRC") launched its "Fair Brexit for Consumers" campaign which urges the future UK Government to ensure a fair deal for both retailers and consumers during the Brexit negotiations with the EU.
BRC's Chief Executive, Helen Dickinson, states that "Britain’s exit from the EU will have a profound impact on the goods that Britain imports, the products that UK consumers buy and the prices they pay". Ms Dickinson therefore asks the future Government "to mitigate the risks by securing the continuation of tariff-free trade with the EU, to avoid further upward pressure on food prices"..."replicate the EU’s existing deals with developing countries" and only then "look to realise the opportunities presented by new trading relationships with the rest of the world".
The BRC has also produced a "Tariff Road Map for the next Government" which outlines Britain's current import trade relationships and, in light of the anticipated Brexit risks and opportunities, lays down the following recommendations to the future Government:
- "Across the board tariff-free trade with the EU should be the top priority of negotiations for the next Government.
- The cliff edge should be avoided through a transitional arrangement that recognises all goods in free circulation.
- Existing benefits of EU preferential trade agreements1 should be secured before pursuing new trade deals.
- A UK Generalised Scheme of Preferences2 should be introduced that is at least as generous as that currently offered by the EU.
- The UK Government should define its independent trade policy early in consultation with UK businesses."
The retail industry must be recognised by the future Government as a significant contributor to the UK economy, but whether it will take heed of BRC's advice and nurture the current stability of our business environment in this sphere remains to be seen.
Avoid Potential Liability for Violating Laws Related to Email Marketing
Authors: Christopher Achatz and John Bush
Email is an important marketing tool for retailers, who should be aware of federal and state laws regulating its commercial use. Since its enactment in 2003, the Controlling the Assault of Non-Solicited Pornography and Marketing (“CAN-SPAM”) Act has attempted to curb the number of unwanted emails and impose some rules on a largely unregulated frontier. When followed, CAN-SPAM Act’s restrictions give email recipients some control over their inboxes and also maintain fairness in how emails present themselves. Failure to follow the CAN-SPAM Act can lead to penalties of up to $16,000 per violation.
In addition, thirty-seven states have laws regulating unsolicited email advertising. The majority of these state laws target commercial or fraudulent electronic mail. Most state anti-spam laws prohibit using misleading information in the subject line of the message; misrepresenting or falsifying the origin of or the routing information on messages; and using an Internet address of a third party without permission. A list of state email laws is available here.
As a practical matter, many retailers use vendors for their email marketing and other email services, and those vendors often assist the organizations in complying with the requirements of the CAN-SPAM Act and state laws. Nonetheless, the party whose content is promoted via email must supervise the conduct of its vendors and employees in abiding by these laws, or else risk possible sanctions.
The basic requirements of CAN-SPAM and most state laws regulating email are:
- Does your email message include: (a) complete and accurate transmission and header information; (b) a “From” line that identifies your business as the sender; (c) a “Subject” line
- Does your email either contain an email address, physical address, or other mechanism that the recipient may use for opting-out of future marketing emails?
- Is your opt-out mechanism effective for at least 30 days after your email is sent?
- Do you honor all requests to opt-out within 10 days?
- Does your mailing list include any recipient that has asked not to receive email from your business (opted-out)?
- Have you tested the effectiveness of your opt-out mechanism?
- Have you reviewed your vendor contracts to determine each party’s responsibilities with regard to CAN-SPAM compliance?
- Are addresses of people that have opted-out transferred outside of your organization?
- Does your organization use open relays or open proxies to send marketing email?
Guest Interview with David Harper
London Retail Team Partners, Sarah Atkinson and Carol Osborne, speak to David Harper, founder of Harper Dennis Hobbs and a Fellow of the Royal Institution of Chartered Surveyors.
- Political uncertainty and the increase in UK business rates are two of the factors currently affecting the UK retail property market. What other challenges will UK retailers have to deal with this year from a real estate perspective?
Supply and demand has been incredibly tight in recent years in the West End of London on the main streets. This has altered in the last 12 months affected by political uncertainty, political intrigue and the omni channel. Retailers are now reappraising their exact space requirements for both London and the wider UK market. For example, in the past a retailer may have wanted 8-12 shops in the London area whereas now they may feel with the omni channel they can exist with four. Some Central London streets are over-rented and corrections are beginning to take place. With good advice from their agents, retailers today are looking to be selective on better terms.
To combat the threat of the omni channel it is important for a retailer to be efficient. As the internet makes it easy for customers to find cheaper alternatives a retailer must offer a positive engaging experience as well as a competitive price.
- The West End is an ideal place for a brand showcase store which can support and enhance a predominantly online operator. What factors do you think are currently determining a retailer's choice of store location?
Any retailer in Central London must operate or take stores on streets that are relevant to them. Firstly, they must identify adjacencies that suit their trading style. Secondly, they need to take space on streets that are "flagship" quality. For example, Regent Street for the premium market, Bond Street for luxury market and Oxford Street for mass market. Customers want to come to a retail outlet that is fun and stimulating giving a 360 brand experience.
- As the migration to online shopping continues with many retailers now operating in their multi-channel world, how are retailers reshaping their store network in response to the growth in online retail?
The omni channel has caused a number of retailers to reassess the size of store being offered. For some it means they want fewer but larger stores which enable them to offer a full range of products in an atmosphere that gives a full brand experience. Some retailers want less space as they believe they can offer the range online. Undoubtedly, now being out of stock is not an accepted reality. If you don't have the item in stock you simply get another store to send it to the customer. While the online experience is all pervasive, a human experience is in demand that only a real store can fulfil. There is a general feeling that we are confused and possibly saturated by the internet and yet more apps. For example, look at the rebirth of book stores.
- What advice would you give to a U.S. retailer setting up shop in London?
My first point would be that despite Brexit and the pound dropping in value, generally speaking retail store prices are the same in London as in other locations worldwide. A number of key brands in London have raised their prices to make sure they are the same, for example, as Paris. Brands do not wish to let some countries be cheaper than others and it's easy to compare prices via apps like So Goods. We have seen brands such as Chanel increasing their prices at least twice since the Brexit vote.
For a U.S. retailer looking at London now, it is probably as good as it's ever been in the last 10 years. There is a wide variety of space on offer and with a lack of other international/domestic competition and new arrivals, landlords are very keen to talk to new innovative brands looking to cross the ocean.
Premiums are on the decline, rent free is on the increase and generally a retailer can get much better terms.
- What's the best thing about your job?
Dealing with exciting new retail concepts looking to come to the UK. Equally helping long standing clients find solutions to pressing requirements and making sure they stay relevant in the omni channel world.
- And the worst?
The worst is the lack of personal communication. Too often we resort to emails whereas a phone call or meeting produces better results as you can discuss matters rather than simply giving a definitive answer which may not be in possession of the full facts.
Harper Dennis Hobbs is the leading tenant rep agency in Europe and are exclusively retained by a number of top brands such as Burberry and Ralph Lauren. David is a Fellow of the Royal Institution of Chartered Surveyors having founded HDH in December 1992. He has led the company from the front and built the business to total some 50 people over the last 24 years. David has been at the forefront of the pan European expansion following his first cross-border instruction from Zara in the Netherlands over 5 years ago.
In the UK market David has been an active market leading agent since the business started. Agency transactions on behalf of tenants have been concluded from Brighton to Inverness. Recent transactions include the purchase of 50 New Bond Street on behalf of Richemont and Oxford Properties, the acquisition of 411 Oxford Street for Longines and Armani in Gunwharf Quays. David is active for a variety of clients including Clarks, Tag Heuer, Fossil and many others.
Think Your Market Is Global? Then Global Consumer Regulators Likely Are Watching Your Business
Author: Douglas Thompson
Advances in internet technologies, global social media platforms, and inventory order management and shipping delivery systems have revolutionized our businesses. Shopping-at-home and catalog sales, markets most retailers never would have considered as recently as 20 years ago, are now vibrant. Your business now may have customers in many different countries. You should be aware of the growing collaboration among the consumer watchdogs across the world, because those regulators may well be aware of your business through consumer complaints.
econsumer.gov is a site sponsored by the International Consumer Protection and Enforcement Network (ICPEN) and supported by the U.S. Federal Trade Commission (FTC) as well as approximately 35 other countries’ consumer regulators. The site provides consumer education and publishes trends regarding consumer fraud complaints. As the tag line of the site reveals, it also is a portal for the collection of global consumer fraud complaints: "Report international scams online." Among the tips the site offers consumers is to use social media to publicize complaints about business practices.
ICPEN suggests that companies have personnel monitoring social media and consider taking prompt action regarding complaints. Your PR and customer experience teams should be aware of this ICPEN recommendation. You should consider training and policies to address handling both on-line and social media complaints. Doing so will help keep customers returning to your business, will protect your brand reputation, and may help lower the risk of intervention by global regulators. For more detailed information about the types of information ICPEN and econsumer.gov is tracking and what you can do to help mitigate your regulatory, brand and litigation risks, please read this complete article.
1. Our existing preferential trade partners are those where, by virtue of being a member of the EU, the UK has a free trade agreement or has adopted the Generalised Scheme of Preferences. On exit from the EU, the UK will cease to be a party to these deals.
2. The EU's Generalised Scheme of Preferences allows selected developing countries to pay less or no duties on their exports to the EU which facilitates their access to EU markets and contributes to their economic growth.
This document provides a general summary and is for information/educational purposes only. It is not intended to be comprehensive, nor does it constitute legal advice. Specific legal advice should always be sought before taking or refraining from taking any action.