U.S. exporters find new paths to profits in Spain

Business America, August 23, 1993 by Amy Wei

Spain's traditional shop owners, particularly those in urban areas, are compelled toward more modern and efficient forms of marketing to survive the intense competition of larger foreign and domestic retailers in the EC Single Market. The smaller retailers will consider alternative methods of marketing and become more innovative entrepreneurs as they find specialty niches in the consumer goods market, invest in development and expansion, or pursue other creative and profitable retail methods.

U.S. exporters of consumer goods, now also facing increased competition from EC member states, can successfully use the developing Spanish retail market to effectively promote their goods in Spain. The new retail channels will add visibility and improve accessibility of American goods to Spanish consumers. Additionally, since Spain's retail market is still underdeveloped, Spain is an enticing target for many foreign retailers.

Today, Spain boasts the EC's fifth largest economy, with GDP reaching $575 billion in 1992, and its fifth largest population at 39 million. Tremendous foreign direct investments since the mid-1980s drove economic growth and allowed Spain to decrease inflation while increasing household disposable income. Overall, Spaniards now have a much higher standard of living and spend more money on consumer goods, travel, and luxury items. However, Spain is now suffering from the same recession that is afflicting the rest of the European Community. In fact, its official unemployment rate of 22 percent played an influential role in recent national elections. The Spanish government now has a stronger economic focus than ever before, and experts have projected economic recovery for Spain by 1995, following the recovery of Europe's larger economies. The recession has strained the Spanish retail market as well, in particular the traditional shop owners.

Spain's retail market has historically been characterized by many traditional shops throughout the country. The small, family-owned businesses with one or two outlets have been a facet of Spanish culture for decades. These shops provide food, clothing, household goods, and books, as well as other products.

Over the last decade, the traditional shops' market share has declined by more than 13 percent. About 75,000 of these shops have closed, while large distribution channels (department stores, supermarkets, and hypermarkets) have been gaining popularity among Spaniards. Overall, traditional shops lack the resources to satisfy changing consumer tastes, adopt new technology, or employ new marketing techniques. Their merchandise is less price competitive since they do not have the necessary storage space or ability to buy in bulk. For the same reasons, these shops are only able to carry a limited variety of goods. Nevertheless, many traditional shops continue to play a vital role in the economies of smaller Spanish towns which are not yet served by their larger competitors.

Small retailers, including traditional shops, specialized stores, and franchises, account for 70 percent of total retail market sales. Traditional and specialized shops, usually located in older downtown shopping areas, will not experience the surge of growth expected of franchising over the next few years. The Spanish consumer today prefers convenience and lower prices. As a result, shopping centers and malls are multiplying throughout Spain, and franchisors are eagerly locating in this prime retail real estate. Franchising is a top export prospect for U.S. exports, according to the U.S. and Foreign Commercial Service in Spain.

Franchising is a recent development in Spain, with only 300 franchises in operation and over 22,000 retail outlets in 1992. Franchising tends to be a popular business method for Spain's young entrepreneurial class since it is usually a profitable venture involving fewer risks than other forms of distribution. Franchising allows the owner to be part of a larger company, while also giving economies of scale for purchases, advertising, and distribution. In addition, Spanish investors and business people are seeking proven, efficient business models like franchising to develop in response to the more competitive local environment.

Among the most prominent franchises in Spain today are Benetton (Italian), Zara (Spanish), Levi's (American), Athlete's Foot (American), and Don Algodon (Spanish). Zara, with outlets in France, Portugal, and New York, is an example of how successfully the Spaniards are adopting the principles of franchising. Collectively, franchise outlets in Spain have increased over 153 percent in the past eight years, reflecting their indisputable popularity.

U.S. franchisors can take advantage of a great opportunity for market expansion in Spain, where franchised distribution presently accounts for just 4 percent of total retail sales. In 1992, total sales for franchises were $500 million, with the sales from U.S. franchises accounting for 70 percent of the total. Approximately 47 percent of franchises are foreign-owned, and 40 percent of those are American. U.S.-owned franchises expect a 20 percent annual sales growth over the next three years, as compared to the 15 percent annual forecast for overall franchise sales growth.