What to do When London's Calling

 | Oct 22, 2012 | 11:30 AM EDT
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With more retail business migrating online, even the post-2008 wave of store disappearing acts were not enough to balance the supply/demand equation in the U.S. As a result, it hardly comes as a surprise that an increasing number of retailers are looking across the pond in search of growth.

One of the recent "how not to conquer Europe stories" is Abercrombie & Fitch (ANF). With a shrinking store base in the U.S., ANF went in search of growth across the pond in 2008. It seemed to make sense at the time. After all, the EU alone consists of 27 countries and plenty of capacity to unload some excess hoodies. 

While the initial launch was cheered as a success, there was a problem brewing.  The majority of traffic in the London store is not local Brits (I estimate 80%+ is tourism). Still, ANF followed with aggressive expansion plans around Europe. A quote from one of the teens working in the London store 18 months ago summed it up. "People who shop here are all tourists ... so what happens when we open in their home cities?" the teen asked. Give that kid a Wall Street signing bonus.

Last quarter, ANF International comps declined 26%. Yes, cannibalization reared its ugly head. In addition to the cannibalization a-ha moment, pricing has also been an issue in my opinion. ANF prices in pounds are the U.S. dollar equivalent ( about 50% higher) and the flagship does not run sales. If you spend much time in London, you know if a retailer is not advertising 30-50% and keeping up with the Jones' during sale season it is not in the game. Yes, even luxury plays ball in London. This summer you simply could not miss ANF as the full-price black sheep during the summer sales. Whatever the culprit, the brakes are on for ANF Europe.

Victoria's Secret debuted its 44,000+ square foot store on Bond Street in London on Aug. 29. With the stock hovering less than 10% from all-time highs, the question is whether we are headed for another ANF. Quite the opposite, for several reasons. First, the approach is slow and steady wins the race. Management confirmed last week it has no plans to let the U.K. success go to its head and pull an Abercrombie. Limited Brands (LTD) will not jump across European borders overnight, rather the company will open 3-5 additional stores in the U.K. next year. That puts the cannibalization question to rest as Victoria's Secret, like ANF, draws a heavy tourist crowd.

Second, VS recognizes global pricing transparency in the marketplace. The company is charging a 15% premium (ex-local taxes) in the U.K. vs. most other retail brands charging a 50% premium (including ANF). Consumers are savvy and will eventually resent being the cash cow.

Third, there is a true void in the lingerie market in the UK. While VS may make the Brits blush, it breathes new life into the category. Market share is concentrated at old-school department stores (Marks and Spencer, Debenhams, John Lewis, BHS). Chains include the shrinking La Senza (after closings 60 stores remain), and Ann Summers (130 stores and let's keep the article PG rated).  

Finally, the numbers speak for themselves. Originally the neighbors on Bond Street were protesting the arrival of VS. Would scantily clad pictures taint the luxury image? I am guessing the naysayers are now applauding the arrival of the angels. After measuring conversion rates over the past several weekends (those holding bags/total traffic) I can tell you VS beat out H&M, Zara and is neck and neck with Topshop. Management was not exaggerating last week when it said London was off to a good start.

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