May 9, 2011

Going Global When You're the Little Guy

When multinational firms start invading your home turf, it's tempting to lead your own cross-border charge. Lolita S.A., a clothing retailer headquartered in Uruguay, hit unexpected bumps when it tried to do just that.

Sharon Kahn
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Over the last few years, multinational firms have eyed emerging economies as ripe for opportunity, with big names such as The Gap and TJ Maxx accelerating their march across borders. But what does that do to indigenous retailers in the target country? Lolita S.A., a clothing chain headquartered in Uruguay, coped with lower domestic demand by mounting its own global push. Here, Lolita’s CEO Michel Cohen shares lessons learned while struggling to create an international presence.

In one sense, Lolita S.A. is an international empire. Its company-owned and franchised stores sprawl across 19 countries, some as far from its Montevideo, Uruguay, headquarters as South Africa, India, and Vietnam.

But viewed another way, the ladies’ apparel retailer is a family-owned business — and means to stay that way.

Lolita began in 1960, when sisters Lolita and Greta Engelman (Michel Cohen’s aunt and mother, respectively) began selling sweaters in Uruguay’s resort town of Punta del Este. Cohen’s retail career started at age six, when he sold painted stones to tourists outside their small boutique.

Milestones followed: In 1978 Michel took over the company reins, expanding Lolita’s merchandise offerings to include a wide range of women’s casual and business clothing and opening several stores in Uruguay’s capital of Montevideo. In 1987 he married Silvina Leibenberg, who owned a small company selling housewares. Four years later she joined the company, specializing in production and design while Michel focused on management and growth.

But in 2002, an economic crisis slammed Uruguay. As consumer demand dwindled, Lolita’s expenses outpaced revenues. Finding bank credit nonexistent, Michel made a gutsy bet to survive: Lolita would sell inventory abroad, far from the troubled region. “In this almost accidental way, Lolita went international and started what later became a franchise system,” explains Silvina. Today, 56 of Lolita’s 70 stores are franchises.

Local Flavor

The strategy worked in the sense that Lolita is now solidly profitable again. But as the business grew, the Cohens found themselves scrambling to keep up with the scale and complexity of the new structure. Logistics of supplying stores in remote places, developing special collections for abroad, and monitoring the brand long-distance took its toll. “We learned that it is very important to take care of the franchises, but not at the expense of harming our own stores and brand,” says Silvina.

Much of the challenge had to do with responding to diverse merchandising needs and management styles. Not only do tastes differ from country to country, so do body builds — Vietnamese stores, for example, carry smaller sizes than do most of the chain. Lolita solved that problem by offering a wide range of choices, allowing franchisees to cherry pick the clothes their customers are most likely to buy. “We also license franchisees to produce styles to meet the needs of their local market,” explains Silvina.

Such flexibility encouraged loyalty from franchisees, but some strayed too far from Lolita’s vision. Consequently, last year the Cohens established strict contractual obligations for the first time. Recognizing that Lolita-designed garb is what attracted franchises and their customers to the brand in the first place, the company now requires franchisees to obtain company approval for all clothing styles and marketing materials. Operating standards were also tightened. “We started applying deadlines to place orders, created return policies, and outlined terms of payment,” says Michel.

Those Clothes Are So Yesterday

Inventory decisions, meanwhile, were being based on intuition rather than operating history because the company had no procedure for capturing data. That, too, changed after the company installed inventory tracking software last year and found, much to their dismay, that some apparel in warehouses and stores was several years old. Fire-sale prices allowed them to turn that inventory into cash, creating the most profitable quarter Lolita has ever had. The new inventory tools also help predict demand, so the company is shipping styles that make sense for each store. As a result, inventory turns have nearly doubled, to about four a year.

Although having stores on five continents provides bragging rights, it’s hard to keep an eye on such a far-flung empire. After enrolling in the Entrepreneurship and Competitiveness in Latin America (ECLA) program sponsored by The Chazen Institute of International Business at Columbia Business School, Silvina decided to pursue a new strategy and focus on growth in nearby Latin American markets. Beside reducing transportation costs, selling closer to home requires fewer departures from Lolita’s clothing line, which is designed with South American women in mind.

“We’ve learned that it is desirable to penetrate those markets that are geographically close, and with which we are rather familiar, before crossing the oceans,” says Silvina. “It is better to simplify operations instead of adding unnecessary complexities.”

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