Bloomberg Línea Ideas — Expanding to a new city or a new country can take a business to the next level, but it’s also a huge financial risk. Even the biggest brands falter overseas, a lesson Starbucks learned all too well in Australia. Despite having more than 30,000 locations worldwide today, the coffee giant failed to understand Australia’s cafe culture, which led to a subsequent retreat — a costly mistake most firms can’t afford to make.
Knowing how and when to expand overseas requires far more than a map. As part of the team at SoftBank Group International that supports portfolio companies as they grow and scale, I’ve had the pleasure of working with Latin America’s leading entrepreneurs, many of whom have expanded to international markets. While there is no plug-and-play formula for success, there are some best practices founders should use in planning to conquer a new city or country.
Adopt a successful framework
Until you enjoy success in your home market, do not expand to another. Founders must ensure they have solid unit economics and have achieved product-market fit before they explore geographic expansion, says Javier Villamizar, operating partner at SoftBank Investment Advisors. Most companies, he adds, are not ready.
Once a company has obtained a strong value proposition, founders need to understand the “market signature” that makes their business successful. Usually, that means having a clear understanding of who your customers are, market structures, and local culture. If you know which demographic is responding most, you can create a model that will be useful elsewhere and target new markets offering access to that demographic.
Take the time to research the customer base and the competition in potential markets. Then assess what products you can offer that will be of value to these markets and what costs are involved in making it happen (hires, regulations, leases, etc). To decide where to go first, give your potential markets each a grade based on the factors mentioned above (e.g. value proposition, cost of going to market, team-building costs, etc).
Withdrawing from a new geography is far costlier than launching, and it takes a lot longer. So it’s essential to plan properly and commit enough resources to do it well.
Pierpaolo Barbieri, founder and CEO of financial service provider Uala, spent nearly two years working with his team on the business model before launching in Argentina in 2017. Four months later, his team was already working on Uala’s expansion into Mexico, a leap it wouldn’t take until 2019.
Unlike the U.S. and Europe, where a single license can provide access to many markets, Latin America’s financial regulatory system is a minefield, which makes it hard for entrepreneurs looking to disrupt legacy businesses in regulated industries. That’s why so many fintech Latin American companies never grow beyond their home region. But for Pierpaolo, this was an opportunity to use geographic expansion as a differentiator.
By starting early and doing the necessary research, Uala has set itself up as an exportable business.
Invest in teams that do their homework
Barbieri’s playbook for success: Start early to analyze a new geography, do the research, assemble a local team, execute and repeat. Villamizar recommends that a dispassionate team who knows your business should conduct market research to provide the systematic analysis of what the best target markets are, what customers want, which products you should offer first, and where your business should go first. Uala launched with a prepaid card in Argentina, for example, but led with a debit card in Mexico, owing to differences in the banking ecosystems.
Keep in mind that you must explain your decisions to your team, investors, and board, so the research needs to be right. Uala spent a year researching the Mexican market — analyzing the size, banking penetration, competitors, and the regulatory environment. Another group with international expertise then handled regulatory matters, getting the licenses where needed, which can be a lengthy process.
Finally, you need a technology team that can build your products in the home market in an exportable way. While products can’t be transplanted, “a successful tech team understands how to build a product in a way that’s exportable,” says Barbieri. So Uala’s tech team develops products for Argentina that, with customization, can be developed for use elsewhere. Barbieri always knew he wanted to expand Uala beyond Argentina, and his technology team started with this goal in mind.
Enjoy repeat success
Success in a few markets doesn’t mean success everywhere. Mattel and Home Depot flopped in China; Home Depot failed in Germany; Britain’s beloved Tesco didn’t make a splash in California – all because the brands failed to properly read the local market and understand the scope of the effort beforehand.
Companies that successfully conquer new geographies will want to do so again and again. But they need to continue honing their expansion playbook by researching, gaining local expertise, ensuring they have a good market-product fit that customers need and want, navigating regulatory matters, and building a team to launch. Success in one market will offer learnings that can be applied to the next expansion. But, as Villamizar warns, “always know you have to recalibrate.”
This column does not necessarily reflect the opinion of the editorial boards of Bloomberg Línea, Falic Media or Bloomberg LP and their owners.
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