E-Commerce: The Growing Allure of Foreign Markets

Karen Epper Hoffman

With strong brand appeal abroad, online merchants in the U.S. are pursuing overseas sales as never before. Two big hurdles are currency management and fraud risk.

Tommy Bahama saw an opportunity abroad.

Executives at the purveyor of island-oriented clothes and home décor knew that their brand would appeal to people outside the United States, according to Lisa Atwood, Tommy Bahama’s senior vice president for e-commerce.

But based on the company’s earlier, arduous experience setting up its online site to sell to Canadian consumers—Atwood describes developing its online retail offering to the English-speaking northern neighbor as a “complex, complicated project”—executives opted for a less homegrown approach.

“It was a no-brainer to partner,” says Atwood of the company’s relationship with FiftyOne Global Ecommerce, which developed and manages the e-commerce site that was launched in 108 countries in mid-July. “They have the competencies we needed to get into so many new markets.”

When it comes to making the most of the global marketplace, e-commerce merchants are in a prime position to expand their sales outside of the United States without worrying about the cost of physical stores. That does not, however, mean that online sellers don’t have their work cut out for them in other ways.

Many retailers, big and small, are weighing the opportunity that selling cross-border online offers. Despite weak economic conditions and financial crises in various part of the world, the chance to open up new markets in both emerging and established retail territories is just too good to pass up—especially now that buying online has become so commonplace.

‘Five Years Ahead’

The pent-up demand and desire for the goods American companies sell is driving these businesses to look beyond their borders to find new customers.

Erika Gallo, global director of risk services for Retail Decisions (ReD), whose payment gateway supports more than 130 merchants (90% of which sell in other countries and in other currencies outside the United States), points to the example of a small retail company it works with that sells branded sports gear.

The recent World Cup soccer series “created a lot of demand at their domestic site,” says Gallo, prompting the company to consider branching out internationally to boost business. “The European markets have always been strong,” says Gallo, adding that ReD is seeing fast-ramping sales in Latin America, China, and Australia. “It’s all expanding dramatically.”

Planet Payment, which handles currency conversion for U.S. merchants selling in foreign markets, is seeing its business grow as “online retailers are looking to expand business and open up new sales channels to international customers without a major change to their footprint,” says Scott Goldthwaite, the company’s vice president for product management and marketing. Planet Payment currently works with merchants through more than 50 banks in 16 countries, including Southeast Asia, China, and, most recently, the Middle East.

Goldthwaite points out that even in more economically developed countries (but especially in emerging ones) goods like high-end fashion apparel are still cheaper to buy from an online retailer in the States. And, on the other end of the spending spectrum, many of the companies that deal in popular digital content like games and music are domiciled domestically, which is driving a lot of potential buyers to American online sellers. “This is just a huge growth market,” he says.

Kieran Macey, head of risk for Europe, the Middle East, and Africa for ReD, agrees that the strength and breadth of U.S. retailer-sold brands coupled with their competitive pricing is driving interest from foreign shoppers in everything from sporting equipment to home goods to mobile prepaid cards.

“The U.S. is about five years ahead on online [commerce] penetration,” he adds, giving them a strong lead when they enter foreign markets. But this is a lead that may be eroding. “A lot of merchants are [expanding internationally] because they feel otherwise they will be left in the dust by the competition,” says Macey.

International expansion often depends on gateways’ willingness to coax their merchants to do it. “We have pushed a lot of them to go international,” says ReD’s Gallo.

Indeed even some larger merchants are only now availing themselves of these international opportunities. J Crew in March launched its global e-commerce portal, which expanded the number of countries in which it sells from 29 to 107.

Now the popular apparel chain, which also operates more than 200 physical stores in the United States, can reach shoppers in Asia, Australia, Europe, the Middle East, and South America, working with FiftyOne to handle transactions across more than 40 currencies.

‘Too Big to Ignore’

FiftyOne works with more than 150 other retailers, including the Gap, Macy’s, Nordstrom, and Williams-Sonoma, to provide the commerce platform for them to sell into more than 100 countries.

“There is a lot of energy and interest in extending into new markets that hasn’t been there before from U.S. retailers,” says chief executive Michael DeSimone, whose platform expanded to include Russia earlier this year. But DeSimone understands retailers’ apprehension: “The intricacies of selling from one country to another are real.”

Among the real intricacies that would-be global online merchants face are understanding, collecting, and paying sales tax (often a value-added tax), handling multiple and often rapidly fluctuating currencies, accepting regional and national payment cards (like China’s UnionPay, for example), managing export declarations, and mitigating fraud risk—all of which can vary wildly from country to country.

“There’s compliance, taxation laws and requirements … You need to become local tax experts” in order to manage selling goods in other countries, says Gallo.

In the past, some merchants have tried to grow more gradually, building their e-commerce business as they would their physical channel, market by market. But in this fast-paced, eat-or-be-eaten global marketplace, with “more and more people buying online and several macro-trends driving global e-commerce,” according to DeSimone, U.S. merchants are realizing that “it’s difficult to execute a global expansion that way.”

41st Parameter, a company that runs risk management for e-commerce merchants and banks, sees more than three-quarters of the merchants it works with doing cross-border commerce, according to Matt Lane, the company’s vice president for customer operations.

While, historically retailers have seen a lot of fraud and crime rings coming from areas like Eastern Europe and Africa, Lane says that the opportunities there and other emerging geographies are drawing U.S. e-commerce merchants to find workarounds to manage risk and currency conversion in particular.

“The rewards are just too big to ignore,” says Lane.

Indeed, Atwood says in the short time Tommy Bahama has had its international commerce site up and running, she’s been surprised by the overwhelming response and traffic they’re getting. This has been true not only in English-speaking regions like the United Kingdom and Australia, where she knew Tommy Bahama would have a strong following, but in Scandinavian countries and Germany and Japan, as well.

Atwood adds that so far the average order size in these foreign markets is three times the size of U.S. orders. Aside from added sales, she says having the local e-commerce presence serves as a great marketing tool for the retailer.

Understanding Risk

But to cash in on these big rewards, merchants are increasingly looking to vendors to handle more of the heavy-lifting—from setting up the sites to handling the complexities of currency conversion to managing fraud.

Turning over the global e-commerce development to a vendor can also give a retailer speed to market. FiftyOne was able to launch Tommy Bahama’s e-commerce presence in more than 100 countries in less than five months, says Atwood, compared to the year it took the retailer to develop and launch the Canadian site in-house.

“Each country is unique and specialized … it would have been daunting [to do this ourselves],” Atwood says. “This way, we serve up a beautiful experience, we let our guests shop, and we take the money from FiftyOne and give them the goods.”

Managing foreign currency is not incidental, says Goldthwaite. As he points out, handling foreign currencies used to require offshore or local bank accounts in each country where the merchant sold goods. Now, foreign e-commerce vendors allow their retail partners to set and change pricing on their products based on changing exchange rates. Vendors typically process in foreign currencies and then settle with merchant clients in U.S. dollars.

DeSimone says this means the vendors is taking on the complex job of managing the currency risk—dealing with fluctuations across currencies from day to day, hedging the risk with banks, as well as just converting and changing pricing.

Vendors will also set merchants up with the ability to accept payment instruments that may be popular outside the United States and so more likely to engage foreign buyers. For example, Goldthwaite points out that bank-transfer options are popular in many European countries, including Germany.

According to DeSimone, some countries like China also have tight exchange controls on payments being sent out of the country, which may ultimately require merchants to build reserves or even set up a local subsidiary.

Managing fraud risk also presents a new challenge in foreign markets, where techniques for mitigating risk may prove less useful and risk may be greater. For example, many online merchants rely on address-verification tools and so-called white lists to tell the good customers from the potential crooks in the United States—options that either aren’t as readily available or dependable in foreign countries.

As a result, vendors like FiftyOne (which itself partners with Visa Inc.’s CyberSource unit on fraud mitigation) need to depend on reviewing a host of aggregated information from IP addresses to the geolocation and internal clock on the buyer’s computer to determine the potential for fraud.

In some cases, DeSimone says, fraud reviewers will use Google Maps to find a shipping location to determine if it’s indeed a valid address. “This is all evolving for us to understand what fraud there looks like,” says DeSimone.

Having these tools in place makes it easier for merchants to sell into foreign markets where risk may traditionally be higher but where there is still a great demand for U.S. products. “We don’t avoid countries just because of risk,” DeSimone says.