Expansion into Europe is not so Easy

By Hans el - November 8, 2012 | Tickers: LULU, TFM, WFM | 0 Comments

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Investment hypotheses for companies frequently include a theory that international expansion will ensure significant growth for years to come.  That rationale often ignores consumer behavior outside the USA.  The truth is that the actions and priorities of the US consumer are different from those of the rest of the world.

Below I highlight two high-octane companies that will, at some point, need to replicate their domestic success internationally to keep up with their valuation. Unfortunately, I don't think that will ever happen for either of these businesses.

Whole Foods Market (NASDAQ: WFM):

Whole Foods very smartly tapped into a under-served market demand from a small but affluent portion of the population that is too busy with life and work to travel all over the place to buy fresh food and organic produce.  This same demographic has become increasingly aware of the risks associated with, amongst others, obesity and diabetes, and how their bodies benefit from healthy diets and regular exercise.  These are macro economic trends that are here to stay.  Whole Foods growth in the US and Canada is not a done deal.  There are hundreds of stores that they will open up over the next years, and they are considering expanding their reach via smaller stores to get closer to neighborhoods, effectively entering The Fresh Market’s (NASDAQ: TFM) territory.

Whole Foods will not replicate its domestic success globally.  The most logical place for Whole Foods to first expand is in Western Europe.  They opened their first store there in 2007 in Kensington, London.  They added 4 smaller stores in London, one in trendy Cheltenham and one in Glasgow.  You know where else they expanded in Europe?  Nowhere.  Anywhere else in the world?  Nope. 7 stores opened up internationally over the past 5 years in 1 country.  That is it. If they cannot make the UK work, they are not going to make it in any other country outside the US and Canada.

Why is that?  Whole Foods' business model is focused on bringing fresh produce from the country into especially large metropolitan areas.  That works well in the US, where there are over 265 cities with a population of 100,000 or more.  In the United Kingdom that number dwindles to 75.  In Germany it's 85, and in Italy it's 47. That is a problem, but not that big of a deal. Store size can be adjusted to the size of the market.

What is more important is people’s behavior:

• In every village, town, and city, there are farmer markets every day.  Produce is fresher than at Whole Foods, and much cheaper.
• For many people, going to these farmer markets is a habit.  Most people also have their local butcher, their local baker, they may even know a farmer 15 minutes away just outside of town from whom they get their fresh eggs.
• The vast majority of Europeans, and I am one of them, will only occasionally pay the premiums that Whole Foods charges...but they'll only pay it a couple of times a year.  They will never become weekly returning customers.

So between demographics, a refusal to pay the premiums that the Whole Foods business model is based on, and the abundance of availability and choices of locations that offer fresher and cheaper produce, Whole Foods’ international expansion thesis is extremely limited.

Lululemon Athletica (NASDAQ: LULU), which sells high end women’s fitness clothing with a heavy focus on yoga, faces somewhat similar challenges.

• Price - While in Europe people will gladly pay $250 for a pair of trendy jeans by the right brand (e.g. Diesel), but women will not pay $100 for a pair of yoga pants.  People care a lot less what they look like at the gym compared to here.
• Type of Exercise – The “indoor exercise” culture (e.g. yoga, general fitness) has just not caught on the way it has taken over the US.  People exercise differently.  They join tennis clubs, field hockey, golf, soccer teams, etc.  Outdoors stuff.  They are very well organized, with clubhouses and cafeterias.  Joining these clubs is as much about exercising as it is about socializing.
• And even for those who do join gyms and yoga classes, it is hard to find someone who goes more than once a week.  Volume is much lower.  Why?  Because their lives are filled with much more daily exercise as it is.  Bicycling to work, walking to the super market, gardening in the backyard.  Their daily lives are just more active on average.

LULU has become a success by capturing the lead in a niche market in North America.  But because it is a niche market, that niche must generate high volume by its consumers.  That is exactly what yoga has become in North America, but not so much in Europe. 

Eat Up, Fools

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