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02 April 2015

Top 5 tips for growing your luxury business internationally

A good number of luxury retailers, such as Louis Vuitton, have grown their own successful international operations. However, there are others that, despite significant financial investment, have struggled to match their domestic success overseas.

By Lewis Cohen

Growing a luxury business internationally has its share of risks velirina

Working with the right partner can reduce some of the risks associated with overseas expansion. A partner can be chosen that has a proven track record of operating in the local market, tried and tested supply networks and distribution channels, a first-hand understanding of the culture, language and local laws and access to key real estate. Luxury brands that are known to have used franchising arrangements to successfully grow into new territories include Giorgio Armani, Dolce & Gabbana, Christian Dior, Tiffany’s, Cartier, Saks Fifth Avenue and Harvey Nichols. International expansion will throw up a multitude of issues for luxury brands. Here are my top five tips:

1. Understand your own resources

Many businesses already possess the experience and skills necessary to establish and support a franchise network. They will have trained staff to operate and manage new outlets, find appropriate stores, oversee store fit-outs and merchandising and have established systems for monitoring performance, all of which can be applied to franchised partners. However, smaller businesses, if they are not careful, can find that the process drains resources that are needed elsewhere.

2. Understand your contractual obligations

Franchise arrangements are usually long-term commitments and it is surprising how often businesses fail to nail effectively the contractual documents, with disastrous effects.  For example, many partners will insist on territorial exclusivity. However, some franchisors fail to compel the partner to continuously grow the franchised business in the territory, in a realistic and appropriate manner for a luxury business, as the price for such exclusivity, for example, through annual store openings and inventory purchase targets. Without proper targets and a variety of enforceable commercial levers for dealing with below-par performance (not just a blunt right to terminate), franchisors can find themselves with un/under-developed territories from which they are locked out, and could end up spending significant sums of money to reverse their position or having to sit out the remainder of a lengthy term with a failing partner.  The contractual documents must also provide sufficient leeway to require the partner to adapt to and adopt developing omni-channel strategies to facilitate a seamless customer experience.

3. Get advice on local laws

Businesses sometimes overlook that overseas countries usually have laws that will apply to the arrangement notwithstanding what the contract says. These include local franchise laws requiring registration and disclosures, rules about how an agreement is executed, terms implied into the contract and terms that would not be enforced by local courts.  For example, in some countries franchisees may be protected against termination or non-renewal and are entitled to a substantial pay-out when the agreement ends.

Businesses often mistakenly take comfort from the fact that the agreement says that English law will apply and any dispute has to be resolved in an English court. However, in all likelihood they will need to take action where their partner and its assets are located.  Many countries will not enforce an English court judgment and it can be a painful lesson to find out that, when needed the most, the carefully negotiated contract is worthless.

4. Protect your IP

Any business expanding into a new territory needs to ensure that it has protected its intellectual property rights in that territory; ideally years before entry so as to ensure that nobody else files registrations that could block the expansion when the time is right.  At the very least, before launching or supplying any products into a new territory, businesses should check that nobody else owns IP rights in that territory that could be used to attack the business.

5. Check your tax and foreign currency positions

Ultimately expansion is not a vanity project; businesses will usually need to make a financial return. It is therefore essential to establish whether all amounts payable under the contract will actually be received, whether they need any approvals to leave the country, whether tax will be deducted or payable;  before any deal identify the most appropriate structures and charging mechanisms for delivering a good and reliable financial return – for both the luxury business and its franchisee.  

Lewis Cohen is a Partner in the Intellectual Property Group at Mishcon de Reya.

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