As Clouds Gather over Europe, Brands Shift Gaze to Emerging Markets

Apr 5, 2012

Topic: Policy

Three years after a global recession, companies are again focusing on growing internationally and increasingly are looking beyond the United States and Europe to emerging markets like Brazil, Russia, India and China — the so-called BRIC countries. These regions’ growing populations and economies offer enticing market opportunities. Yet when considering foreign expansion, companies should proceed with full awareness of the economic, political and cultural idiosyncrasies of various countries.

China, India and Brazil emerged in the top three spots on A.T. Kearney’s 2012 Foreign Direct Investment Confidence Index (FDI Index) this year, while the United States dropped to fourth place from second in 2011. Only six of the countries were from Europe. Germany and the United Kingdom, the outdoor industry’s largest and second largest markets in Europe, were ranked fifth and eighth. Russia — the fourth of the BRIC countries — rose to 12th from 18th. More than one-half of the top 25 countries on the FDI Index are from the developing world, indicating investors are increasingly turning to the developing world more for its large and rapidly growing consumer markets than for its lower-cost labor.

“We still have a lot of growth to do in the United States, but feel there is a huge opportunity for this iconic brand internationally,” noted Jerry Rinder, an executive at Woolrich, which is looking for distributors in Australia, New Zealand, South Korea, South Africa, Brazil, Argentina, Chile and Central America.

A.T. Kearny reports that ballooning deficits in the United States and Europe’s sovereign debt crisis are driving the shift toward emerging markets. These concerns are certainly top-of-mind in the outdoor industry.

“We are concerned about the near-term strength of Europe as it tries to figure out and map its future,” notes Perry Dowst, owner of Jetboil in New Hampshire. “This seems to be balanced by the optimism and energy in the emerging markets, including the Asia-Pacific region, South America and, perhaps to a lesser extent, Scandinavia and Eastern Europe.”

“We don’t have huge expectations for Europe,” said George Brown, director of international sales for Vasque, which has long found it tough to gain a foothold there, where there is a strong preference for domestic brands. “Our concentration is more on Asia, the Pacific Rim countries and Latin America.”

European countries are also looking beyond their home markets. Finland-based Amer Sports is focusing its geographic expansion on Russia, China and Latin America, which together accounted for 7 percent of sales in 2011, up from 5 percent a year earlier. VF Corp. expects to open about 550 new retail doors in China this year for The North Face, Vans, Kipling and its jeans brands and anticipates Timberland will grow sales in China by 15 percent. Columbia Sportswear’s sales to Latin America and the Asia-Pacific region grew 29 percent in 2011, helping boost international sales to 44 from 41 percent. Germany’s adidas Group reported that its fourth quarter growth was “driven in particular by robust consumer spending in the emerging markets, which offset subdued consumer confidence and private spending in some Western European markets and in Japan.”

As outdoor executives move beyond North America and Europe, however, they need to keep a few caveats in mind. For instance, when economists gush that India and China each boasts a middle class of 250 million, it’s important to remember that “middle class” in China means an urban household with income of about $13,000. In India, the figure is even lower.

“People get the idea that everyone in China is rich, but the middle class there does not make $50,000 a year,” said Brown. “For the middle class in China to buy outdoor product, it’s four or five months of savings.”

For this reason, it is as important to look at per capita income as overall GDP growth or market size. After all, economists predict it will take China until 2050 to raise its per capita income to $20,000. Smaller brands may be better served by being bigger fish in smaller ponds where incomes are higher and growth rates, while not as robust as in China, are still in the high single-percent range. Chile, for instance, is often overlooked because it’s a relatively small market of 17 million people. However, the country’s gross domestic product (GDP) per capita is nearly four times higher than China’s, and Chile boasts one of the most open economies in the world. South Korea, with its GDP per capita of $20,757 and a population approaching 60 million, has emerged as one of the most robust export markets for U.S. outdoor products.

While India is home to the Himalayas and the world’s largest democracy, its spotty infrastructure, stifling bureaucracy and new signs of hostility toward foreign investment is causing even some large companies to pause. Brazil may have slain inflation, but remains a highly protected market.

Executives with many fast-growing, U.S. equipment brands contend that Europe still holds the most promise for international sales because of the continent’s affluence and deep cultural ties to core activities such as mountaineering and paddlesports. Still, even these companies are shifting their attention eastward and southward as incomes and currency reserves grow elsewhere.

“When we look at the European market, there is obviously a very attractive customer there, but not a ton of white space to carve out,” said Brett Jordan, CEO for American Rec’s equipment business, which includes the Kelty, Sierra Designs and Wenzel brands. “When we look at emerging markets we see a lot of white space. We see a demographic that is shifting, that was not part of outdoor recreation and that is now looking at that as part of their lifestyle.”

Compare demographic and economic data for emerging market countries.