Breaking Into European Markets By Breaking The RulesBy
The American way isn't everybody's way, of course. But U.S. companies doing business in Europe too often settle into its inefficient, shared markets, with rigid distribution systems and low volumes. Recently, some brash arrivistes have begun flouting the European rules with classic American competitive tactics. Here's how three--Bandag, Dell Computer, and Toys `R' Us--are cracking Fortress Europe.
BANDAG: RETREADING THE TIRE BUSINESS
Pumping up European sales volume was one of Martin G. Carver's top priorities when he took charge of Bandag Inc. in the early 1980s. Although his family's tire-retreading business had been in Europe since the 1950s and enjoyed an enviable reputation for quality, its exclusive distributors followed local conventions: They charged high prices and never worried much about volume. Worse, the last of Bandag's major patents were running out, so Carver knew the competition would soon get fierce.
Bandag's response was to make itself over as the McDonald's of retreaders. It dismantled its distribution network and started over with aggressive new franchise units, costing around $150,000 apiece. The tactic worked. Bandag's share of Western Europe's retread market has shot from 5% to 20%, putting the Muscatine (Iowa) company in a tie for No.1 with France's Michelin. In the first three quarters of last year, Bandag's European revenues were around $76 million, or 18% of its global sales, compared with about 5% in the early 1980s.
BIG BOOM. Analysts expect Bandag's European business to boom next year, when trade barriers fall. Freer trade will heighten competition among truckers, forcing them to look for bargains such as retreads--which sell for about half the price of new tires. Partly because of Bandag's European prospects, investors have bid up its stock sharply. It now trades at around 119, or 40% above a year ago, double the gain for the Standard & Poor's 500-stock index.
One important reason for Bandag's European success is its unique approach to sales and service. Instead of making customers come to Bandag outlets, franchisees do much of their business in specially designed, $60,000 Mercedes trucks filled with tires and equipment. A technician removes a customer's worn tires and replaces them with retreads on the spot. The rolling workshops are convenient, but more important, Bandag sends them out after hours so clients can keep their rigs on the road during the day.
It's a radical departure from the way other tire vendors operate on the Continent so potential franchisees required some convincing. German tire dealer Manfred Schwaderer, for one, had big doubts: He didn't think anyone would want to stick around for after-hours tire service. Now, after finding he could save clients $500 a truck per year by servicing vehicles when they weren't producing revenue, he's a believer. Schwaderer operates a pair of Bandag distributorships and is planning to set up more.Bandag's European unit has plenty of room to grow. Based in Zaventem, Belgium, it has 336 outlets in Western Europe. But that's only half the number Michelin has. To keep growing, Carver next wants to expand in cost-conscious Eastern Europe, with a goal of doubling Bandag's market share by 1995. Basic retread economics make his plan seem possible. And those fancy Mercedes trucks won't hurt, either.
DELL: MAIL ORDER WAS SUPPOSED TO FAIL
When executives at Dell Computer Corp. decided to march on Europe in 1987, they knew they had to win over a deeply skeptical public. European customers had never bought big-ticket items such as PCs through the mail--the only way Dell planned to distribute them. "In every country, they told us mail order would not work," recalls Andrew R. Harris, senior vice-president for international operations at the Austin (Tex.) company. The Texans, deep discounters from day one, also found that European buyers have a long-established prejudice: High price equals good quality, low price means shoddy.
Yet Dell has stunned rivals and naysayers by going from no European sales to some $240 million for the year ending Feb. 3 (chart). European sales, 95% to business customers, have become a key part of Dell's revenue picture. They will constitute nearly 30% of the estimated $870 million Dell rings up this year, almost double the 1988 share. Even Dell is surprised by its growth spurt, particularly among corporate buyers. "Having bought one or two times, they find they need better service--or may not need the extra features of an IBM or Compaq machine," says Elizabeth Montgomery, a computer market researcher at Britain's Inteco. "They just need something reliable, and Dell fits the bill."
DIRECT PITCH. To get doubting European buyers to give its PCs a try, Dell waged an intense "education program"--really a series of ads in computer magazines and direct mailings throughout Britain and the Continent. The campaign, printed in seven different languages, stressed Dell's reputation for quality, service, and price. The tagline in most ads: "It's Best to Be Direct."
Perhaps most important, Dell has made good on its promises of superior service--delighting European consumers who have grown used to long delays and ineffective service calls. "We had delivery in about two days," says Tim Dempsey, deputy computer manager of London's nonprofit Institute of Directors. "Every month, we get a call from Dell to make sure that everything is all right. I've never heard of anything like it."
For Dell, the pickings have been best on the Continent, where PC prices, set by European companies such as Groupe Bull's Zenith Data Systems and Olivetti, were double those in the U.S. As Dell has swept into Germany, France, Sweden, Italy, the Netherlands, and Finland, rivals have had to slash their prices. Even IBM and Apple, which sell through expensive dealer networks that Dell doesn't use, were vulnerable. Dell is still puny by comparison, but its share of the Western European PC market has doubled, to around 1.2%, in the past couple of years, figures Dataquest Inc. In the meantime, market leader IBM slipped to 17% from 21% in 1990.
Now, Dell would like to present a more unified face to European customers. One goal is a single, Continentwide price. Another is guaranteed five-day delivery, which isn't yet possible in every market. Based on Dell's experience so far, Harris urges other U.S. companies to dive in. "Dell is sort of a beacon," he says. That may be overstating it a touch. But considering that most people dismissed Dell when it arrived, he can be excused for beaming.
TOYS `R' US: MAKING EUROPE ITS PLAYPEN
It's one thing to move into a new market and encounter skeptical suppliers or dubious distributors. But when Toys `R' Us Inc. announced plans to open its first German store in 1987, it got an unusually strong dose of outright hostility. Some German toymakers, fearing Toys `R' Us's hard-sell tactics would squeeze their high profits, refused to sell to the retail giant. At the same time, many small toy retailers warned parents about the dangers of Toys `R' Us's self-service approach, which didn't provide "experts," as they did, to explain the intricacies of jungle gyms and other potentially dangerous toys. "They predicted our demise," remembers Larry D. Bouts, president of Toys `R' Us's international division. "They said new things don't work."
They were wrong. Thanks to unprecedented selection, low prices, and an American-style advertising assault, Toys `R' Us's European revenues are climbing at triple the growth rate of total sales and are headed for $800 million in the fiscal year ending Feb. 3. Starting with just five stores in 1985, the retailer now has 76 and counting (chart).
The key: getting Europeans to buy toys for children anytime, not just Christmas. Year-round ads emphasize both Toys `R' Us stores' size and their low prices. They also trumpet a groundbreaking "no quibble" return policy.
In Germany, advertising year-round did more than raise Toys `R' Us's profile. The company's ads forced hidebound retailers to drop their modest Christmas-only advertising policy. The industry's new 12-month ad blitz has helped increase the German toy market by 50% since 1987, to $4 billion. "We got just a quarter of that increase," says Arnt Kl oser, managing director of Toys `R' Us in Germany. "In the end, everyone benefited."
FREE RIDE. Toys `R' Us's booming sales have been a boon for some of the German toymakers that didn't shun the American upstart. Toys from companies such as M arklin and Cosmos are showing up in Toys `R' Us stores across Europe and may soon appear in the U.S., if they can be produced in the volume that the chain requires. A few German manufacturers are getting a free ride into the hard-to-crack Japanese market, thanks to Toys `R' Us's hard work in establishing outlets there (BW--Dec. 9).
Toys `R' Us is likely to have a leveling effect on European toy prices, which can be twice as high in one country as in another. The Paramus (N.J.) company now buys from distributors in each European country, suffering the same price variances as consumers. But it should be able to find Europewide sources when market barriers fall.
The Toys `R' Us revolution is a long way from over. On the way to a goal of 300-plus European stores, it recently opened its first Eastern European outlet--in Leipzig--last October. "We had 35,000 visitors--our biggest grand opening," says Kl oser. "With only 60% or 70% of the buying power of the West, these people showed they're willing to buy toys for their kids before they got a new coat for mom and pop."
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