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Warning: Choose your initial export markets carefully

Choosing your initial markets will be one of the earliest and most significant export decisions you’ll need to make, with dire consequences if you get it wrong, Yes To founder Lance Kalish writes.

Trade show season is around the corner, and potential Australian exporters are gearing up to take advantage of local and international exhibitions to kick start their export businesses. No doubt each and every exhibitor will be deluged with introductions and offers from international distributors and retailers. But once the trade shows are over, it’s time to take stock of the plethora of opportunities lining your palms in the form of numerous business cards.

One of the first questions you’ll need to ask yourself is which country or countries do you export to first? Should you start with the USA, being the largest of the English speaking, common law based countries? Or perhaps the UK, because you’re familiar with the culture and the customer and you have a lot of family there to advise you? Or maybe you should capitalise on the Chinese opportunity, because it’s the highest growth market and the one that everybody at the trade show is talking about, right?

I can tell you that making this decision will prove to be a critical in the development of your company’s export strategy. It’s easy to get excited and want to be everywhere as soon as possible, but tread carefully. If you choose the wrong countries to start with, you could easily end up wandering down the disastrous path to export purgatory.

The most common mistake I have discovered when advising companies that have been unsuccessful in their export ventures, is that the initial countries they chose to export to were based on feeble and impulsive decisions. Regardless of the Chinese distributor who told you they would put you in 40,000 stores before the end of the year, or the American broker who has “connections” to all the major retailers in the US, the selection of your first export market needs to be based on a well crafted pre-export plan and a carefully developed set of criteria.

It needs to include a delicate balance surveying multiple initial market opportunities against your current level of resources, experience, and desired short and long-term business goals. Only then can you commence the culling process that hones you into the handful of optimal markets you can consider initially exporting to.

Now no company is flawless and is expected to ace their first attempt in exporting to a new market. In fact my own skincare company possesses an abundance of export skeletons that paved the way to the now 29 countries we successfully distribute to today. So I can speak from experience when I say that the consequences of failing in a market can be damaging both short-term and long-term as well. Short-term consequences are better known, such as the waste of resources and time, opportunity cost, and cashflow. In particular, is the flow-on damage these consequences can cause to your domestic business in the form of distraction and cash drain, and the general apathy that can then develop towards establishing new export markets going forward.

But it’s the long-term consequences that are lesser known and underappreciated, in particular for companies who are trying to build a sustainable and valuable brand or reputation, with the view to selling their brand or company down the line. One is the penalty in valuation your company may incur when the time comes to sell your brand or services. Large acquirers, in particular multinationals who have a presence in several of your target export markets, may not pay you the same value for an unsuccessful export market that they may pay you for your booming domestic one.

In fact they will often go as far to say that the most they are prepared to pay you for a market will be a heavily reduced multiple of your current export sales to that specific market. If you are struggling in a particular market, those reduced sales could set the low benchmark price that an acquirer will agree to pay in the end for that market. It may even result in the potential acquirer discounting for valuation purposes all your export markets in fear that with deeper inspection other markets may be hiding the same skeletons that led to a failure in the unsuccessful market.

Or they may take the view that the globalisation possibilities of your products may prove too difficult and cumbersome. Most multinationals will build a valuation model on your business that accounts for the commercialisation of your products in global markets, in particular markets where they have a strong presence. They will generally base each market forecast on similar products that they distribute in that market (which is usually far higher than the target acquisition is capable of achieving). If this includes a failed export market, they will tend to use that as a convincing excuse to lower your overall company valuation.

I vividly recall, shortly after we had closed our first major capital raising, our newly appointed American chairman of our board (who was a principal at the private equity firm who had just invested in our company) ravaging through a review of our current export markets for the first time (we were in 12 markets at the time). The company was barely two years old and we had had a mixed bag of successes and failures in export. He looked at me in a perplexed manner and asked why we were in so many markets, and how we could possibly succeed with the limited resources we had in this number of markets in the way we had done so in the US. My response was not very sophisticated because I knew he was right.

At least two thirds of the markets we were currently exporting to were created based on rash decisions that so often characterise young companies that are hungry for revenue and cashflow. These were all shortsighted decisions to enter into new export markets in order to patch up holes in our cashflow, but that also may have seriously lowered our long-term value and international growth plans for some time.

We spent the next three years focusing on getting out of or restructuring distribution arrangements in numerous markets which made no sense for us at that stage of our business, and reallocating resources and attention to the markets we believed were ideal for us from both a short and long-term perspective.

This is one of the main reasons why many US-based branded products companies (my company, Yes To Inc. is based and operated out of San Francisco, USA) focus the first few years optimising and reinvesting their cashflow into the local US market, and when they are ready for export they tend to concentrate on no more than one to two markets at a time, those markets often being Canada and the UK.

It may seem that many US companies have a myopic view of global opportunities, but in fact it comes more down to the fact that they don’t like to operate in environments they don’t understand completely and cant dominate in. This ostensibly haughty perception actually helps promote a robust pre-export discipline and strategy that reduces the level of export failures over the time.

It is this discipline that every Australian company needs to emulate and establish before they even consider exporting to a new country. Developing this pre-export strategy will significantly help to mitigate export failure risk prior to committing the resources and pressing the green light for your lucrative export adventures to commence.