The closing of Target recently in Canada is just the most recent example of a US based chain misunderstanding the size, value or opportunity of a foreign market!
Ironically a foreign hospitality operator has a far better chance of operating profitably in the US, than the same US Company trying to operate in a foreign market.
The issues for US Chain Operators can be narrowed down to 5 Fatal Flaws:
1. A Buck is not worth a Dollar
It’s surprising how many people overlook that a US $1 may be worth more or less in another market. A US $10 cocktail in Canada must sell for 25% more purely based on exchange rate values, assuming Canadian input costs and gross margins are the same as the US, which they’re not.
2. Perceived and Received Value
Perceived value in one market may be considered fantastic, yet in another the Received value may be considered meagre. There's a very fine line distinguishing Perceived and Received value.
3. Cost blow-outs compare A.L.Ps (Alcohol, Labour, Produce)
Alcohol - is far cheaper per Oz or mL in the US than almost any other major market in the world... how easy to assume that the cost of alcohol in Canada is the same as that in the US or the UK.
Labour - many US hospitality businesses pay minimum hourly rates yet the costs of the same labour in another country such as Australia, Germany etc. can be 2-5 times more expensive.
Produce - costs are considerably lower in the US compared to other markets... a starter valued at US$9.95 may have to sell for CAN $14.95 just to maintain the same value, margins based on local cost conditions.
4. Unrealistic mandated COGs
Higher COGs outside the US drive operators in other markets to be continuously cost vigilant, looking to drive operational/cost improvement.
In the US a 20% COGs is nominated as the benchmark for managing spirit costs, however in another market that same cost could be 25% or more.
In Australia with double the costs of alcohol with similar retail price points as the US, how can alcohol mandated COGs also be 20%
The answer here is pretty scary, US operators operate on super normal margins i.e. low costs and relatively high price points. For averages to fall down to a 20% COGs , would indicate that either heavy discounting via give-aways, over-pouring, floor tips, or worse are occurring ... these losses are hard to see when hidden in the valley between large profits and low costs.
To uncover untoward losses in the US, we’d suggest reducing COGs mandates to 15-17%, whilst many will baulk at the number, the truth would quickly reveal itself.
To better understand averaging issues, sending businesses broke read "The Claw of Averages" blog here.
5. Ignorance is Arrogance
A failure to do due diligence at the deepest level can account for most of the major blow-outs that either better planning and tighter operational mandates would have eliminated.
International hotel groups tend to find domestic partners when opening in new markets, nevertheless whilst this helps, it may not overcome some of the difficulties flagged above.
Some years ago a US Nightclub Operator opened a large property from scratch in a new country using a local partner, discovering after signing the deal that Alcohol and Labour costs were double that of the US, ouch... the question was asked “How do you guys make money in…?”
There's are no easy ways out of opening up outside the US… suffice to say understanding the 5 Fatal Flaws is a great start to not getting caught.
