Glocalization: Easier Said Than Done

Baldwin Louie — Mon, 09 Oct 2000 15:00:00 -0700

Last year, British Internet pioneer Lastminute.com did what so many U.S. Net firms are now planning to do: It rolled out a bold and risky Pan-European strategy. By December, having already launched sites in Germany and France, the online travel company, which specializes in discounts on unsold plane tickets and hotel rooms, debuted in Sweden. "Sweden's a technologically advanced country. They buy things with credit cards, they travel all over the world," explains Tom Virden, a company VP who at the time of the Swedish debut oversaw international development. "The business plan was perfect."

But perfection can be elusive, particularly for companies expanding into foreign markets. At first Lastminute Sweden scored solid traffic, but after the initial rush of customers burned through the site's deals there wasn't much stockpiled to sell. Soon, customers were turning their backs, frustrated and underwhelmed. Lastminute Sweden had created a nightmare cycle for itself: Good word-of-mouth generated new visitors, who in turn generated bad word-of-mouth.

The problem was staffing. Like many foreign companies, Lastminute had put down stakes in white-hot Stockholm, center of the region's economic surge, and an infamously tight market for talent. The travel business demands a network of well-connected staff to harvest good offers, but Lastminute Sweden had to rely mostly on recent college graduates, managed primarily from London, while the company scrambled to find a managing director with experience and local contacts. "In other countries, we've rarely had anyone turn down a job offer," Virden says. "But at the time there were 60 dot-coms lined up to go public in Sweden, and zero unemployment. It took the Swedes a long time to make up their minds [about job offers], and often once they did, they told us no." In Stockholm's close-knit new-media scene, Lastminute simply wasn't part of the family - something its executives hadn't figured on.

Finally, seven months after launch, Danish travel veteran Henrik Bjørn-Hansen took over the operation, with hopes of rapidly expanding his staff with more senior managers. Though Lastminute Sweden still faces competitors that have a near stranglehold on the package deals so popular in the region, the site's sales have finally started to rise. "Our first launch was not ideal," Bjørn-Hansen says with Nordic frankness. "So now we need to re-attract all those customers who visited the site and found nothing for them. In some ways, we're very much at the beginning again."

Lastminute is headquartered in the shadow of Buckingham Palace, but its travails in Sweden aren't simply a British problem; in fact, they closely resemble the problems facing U.S.-based Net companies as they expand internationally. "We're seeing a very widespread trend among U.S. companies toward globalization, and it's not just large-cap companies," says Michael Elliot of New York- and London-based eCountries.com, which connects such firms with local businesses that specialize in everything from headhunting to accounting. "Many small- and medium-size companies in the States have started to notice overseas competitors and think, 'If they're coming into our market, maybe we should go into theirs.'"

Business-to-business infrastructure-builder CommerceOne is among the bigger U.S. Net companies currently pumping cash into a European expansion. This summer it forged an alliance with German b-to-b giant SAP. Last year CommerceOne competitor Ariba (ARBA) set up "regional hubs" in Amsterdam, Munich, Stockholm, Zurich and Middlesex, England. On the online retailing side, in June Priceline.com announced a separate venture, Priceline Europe, which plans to get a U.K. site up this fall with Germany, France and Benelux expansions to follow.

For American companies, European expansion often begins in London, the path of least linguistic resistance. But the U.K. is the shallow end of the Pan-European pool; eventually you need to dive into other markets scattered throughout the Continent. "Scattered" is the operative word here. Forrester Research (FORR) says in order to reach 80 percent of Europe's e-commerce market, companies need to be active in France, Germany, Holland, Italy, Sweden and the U.K. This is where things get dicey: Such a company would need to operate in six languages, six legal structures and three currencies (the English pound, the Swedish krona and the euro).

It gets worse. The canon among global strategists is that foreign outfits must try to look and feel like a local company - thus the buzzword "glocalization." Yahoo (YHOO)'s global success is often attributed in part to its glocalization strategy, which involves hiring teams of locals to sift through content for each Yahoo site launched outside the United States. Ola Ahlvarsson, chairman of Results.com, a site that specializes in helping foreign companies spur their European expansions, says, "Everything customer-oriented has to be localized, but also your management has to be locally present, with natives on board, so that you become a topic at the breakfast table, on TV shows, in the local magazines. Otherwise you're the big, bad wolf, the outsider that everyone hopes will lose."

American companies have a reputation for trying to bully their way into foreign markets without studying local conditions. Daniel Gestetner, CEO of Pan-European shopping portal ShopSmart, recalls his late-1990s experience at Revlon (REV). "We tried to expand in Asia by selling American glamour, using our Cindy Crawford ads," Gestetner recalls. "L'Oreal (LORLY) used a Chinese star." Revlon took a beating. Today, Gestetner sees a Europe full of Internet opportunities created by American oversights. "So many major American companies dip a foot in the U.K.," he says. "Then they try to sell their product the same way [throughout Europe]."

The costs of localizing in several countries, however, can drive companies out of business. Take the now-collapsed Boo.com's brash bid to simultaneously launch sites in 14 countries. "We probably should just have had skeletal staffs in the U.S., Germany and Sweden," says Ian Tester, a former Boo business development manager. "But our game was this complete landgrab."

DressSmart, the European clothes-shopping portal founded in Sweden, also expanded quickly around Europe. "All the VCs told DressSmart, 'Go Pan-European! Go all the way!'" recounts Forrester Europe analyst Abigail Leland. "Then when the next round of financing came, the rug got pulled out from [under] them." The VCs had decided DressSmart was spread too far. The company ran out of money this summer.

Lastminute's Pan-European push has certainly been expensive, with operating costs rising an estimated 800 percent since it began its expansion last year. Yet its most recent earnings reports had the U.K. operation still accounting for 89 percent of the company's revenues. Though Lastminute had $164 million in cash reserves in June, if its expected expansion revenues fail to materialize, Lastminute's burn rate could sink the company.

Like many companies, Lastminute didn't have a well-defined Pan-European strategy from the beginning. "When I originally sketched out Lastminute, it was focused on the U.K.," says CEO Brent Hoberman. "I wouldn't have dared to think so ambitiously as the whole of Europe." Though the business model that eventually scored funding had international components, he says venture capitalists probably discounted the European projections. Yet Hoberman is very much the cosmopolitan European. Tall and dark, he has lived in Paris, the south of France and Berlin; his mother lives in Portugal, his father in New York. With this background, it seems unlikely that any company Hoberman cofounded would confine itself to one country. And then there's ambition. "My very simple grounding in economics tells me you should build barriers to entry to your competitors," he says. "And entering new markets makes you very hard to follow."

With $62 million raised from its initial investment rounds, Lastminute slated its first expansion for fall 1999; another $176 million brought in from its March 2000 initial public offering fueled the continuing effort. Based on numbers for Internet penetration, travel and overall e-commerce, Lastminute decided on its first three countries - economic powerhouse Germany, surging France and Net-crazy Sweden. Holland, Italy and Spain would follow.

After setting up shop in London, eBay (EBAY) and Amazon.com (AMZN) also used Germany as a beachhead for entering the continental market. Germany's lure is its 82 million residents, relatively strong Net usage and high levels of disposable income. Scandinavia has a fervent Internet-user population, but relatively small market. France, Italy and Spain have major potential markets, but relatively low Net penetration.

For Lastminute, the basic plan for all these countries was the same: set up an intensely localized operation headed by a native entrepreneur. "We're about what's hip in each country, so if we sent an idiot American like me into Paris or Barcelona, they'd fail," Virden says. "We need a national running things locally, someone who's talking the talk and understands the [cultural] subtleties." Each local outpost would control its site's content, tone and marketing, while London would control the technology and finances.

But Lastminute would find that localization is easier said than done, particularly when it comes to tailoring offerings to customers in different countries. Typically, Germans assiduously plan their trips ahead, often wanting to know each detail down to the contents of the hotel minibar. Spanish customers, meanwhile, are used to paying extra for their notorious spontaneity. The Dutch prefer to drive their own cars on vacations, while the British fly. And prior dealings with their own travel industries strongly shape each nation's customers. "The Dutch expect a very honest description: 'Lively beach resort' means lots of discos; 'former fishing village' means it's a mess," explains John Nijhof, who manages hotel offerings for Lastminute Spain. "But the British expect exaggerated wording. So you can't just translate the copy, because customers from each country would understand the same descriptions differently. It's like star ratings - three stars in Spain is a pretty good hotel; in London, it's often crap."

Likewise, Lastminute had to tone down its signature flippant British humor for Germany and Spain, where such an attitude can offend customers. Cultural issues arise, even with payment methods. "In the U.K., 98 percent of our sales are with credit cards," says Philipp Montgelas, the co-managing director of Lastminute Germany. "But in Germany, many people don't have them, or are afraid of online fraud. We had to develop direct-debit and invoice systems. Sometimes we're still getting deutsche marks by mail. That's not optimum for an Internet site."

Lastminute Germany had a low-key start in June 1999. Montgelas alone ran the operation working out of a small office he found through a friend. Lastminute had chosen Munich because of Montgelas' strong contacts there.

In March 2000, the company ran into a serious tangle. Germany's most established travel company, L'Tur, dragged Lastminute Germany into a Hamburg court for copyright infringement. L'Tur claimed exclusive rights on the phrase "last minute" within the travel industry. In Germany's new economy, the lawsuit was treated as a landmark case for the new economy. If L'Tur won, Lastminute Germany would lose rights to its very name. Though the case raised Lastminute's profile, getting sued by a local player was not the best form of publicity.

Although the lawsuit was unexpected, the "last minute" issue was not. Before going into Germany, Lastminute discovered that four companies held rights to the URLs Lastminute.de, Last-minute.com and Super-Lastminute.com. And for years, the English phrase "last minute" has had a very specific meaning to German consumers: cut-rate, cattle-car service. This posed a major obstacle for the U.K. company - most Germans wouldn't click on Lastminute.com expecting to find rooms at the Ritz Carlton, though the site regularly offers deals at such luxury hotels.

Company execs long debated whether to change its name for the German market - perhaps the ultimate localization move. The strongest alternate: Spontan.de, drawn from the German word for "spontaneous." But ultimately, sticking with Lastminute.com won out, for fear of diluting the company's brand. Globalizing companies commonly face such choices, finding the balance between what's best for a local market and the needs of the larger company. Either way, somebody loses - usually, the local entity. Even today, "every time we do a big campaign, the metrics for Lastminute.de also go up," says Anja Treskow, Lastminute Germany's PR director. Journalists still write glowing Lastminute.com profiles that mistakenly refer to the site as Lastminute.de.

To emphasize its brand, Lastminute Germany's marketing material displays "Lastminute" in white, with ".com" in the company's signature flaming magenta. Earlier attempts to migrate its successful U.K. campaigns yielded poor results because the sardonic British tone didn't work. To help redefine the term "last minute" for consumers, Lastminute's new ad campaign sports a pretty model in stylish gossamer clothes, with the tagline, "And I always thought it was just travel ..." and a list of the site's other categories.

On the upside, this June the company won its first round in court against L'Tur, which had one of Germany's top law firms defending it. "We got very lucky," Treskow says. "Often German judges don't know much about the Internet. But [our judge] really got into the industry."

Though Lastminute Germany can keep its name, its sales are dwarfed by L'Tur, TUI and other established travel companies. But Lastminute has managed to break L'Tur's long-standing monopoly agreement on short-term flights with Lufthansa Airlines by offering Lufthansa shares in Lastminute if it meets certain supply quotas. "L'Tur had been very conservative with Lufthansa," says Montgelas. "We can sell their flights to our entire international network."

Launching in October 1999, Lastminute France faced a challenge opposite that of Germany's battle for mindshare. "French people aren't used to the concept of last-minute travel planning," says Denis Philipon, managing director of Lastminute France. "We have to coax the market into emerging, and convince people not to feel guilty about operating this way," he says. The marketing campaign has hammered at that point, as has the company's publicity with the French press. French suppliers also had to be sold on the concept. "The beginning was very difficult - we had to start with the smallest operators and only move up to the bigger ones later," explains Philipon.

This past August, Lastminute tried to solve its French problems, at least in part, by buying a local company, Dégriftour, for $82 million. It was the closest thing in France to Lastminute, but far better established. Dégriftour started with Minitel (a computer network in France), launched a site in 1996 and today controls 50 percent of the country's online-travel market. In France alone, Dégriftour boasted almost quadruple the global revenues of Lastminute, 2.5 times the customer base and almost twice as many suppliers.

Lastminute CEO Hoberman had long joked about buying Dégriftour, because the French site had such a similar business model. "In France they considered us cheeky competitors," Hoberman recalls. "So when we first called, they said, 'No way. Who the hell are these upstarts?'" Undaunted, Lastminute's bankers talked to Dégriftour founder Francis Reversé. Finalizing the deal took roughly half a year, but it still shocked some analysts. "I'm amazed they pulled it off, given the expansion they're doing," says Heidi Fitzpatrick of Lehman Brothers London. "I'm not sure where they found the time."

Integrating the two companies will prove a complex operation, and Lastminute won't be going on an eBay-style European acquisitions spree. "Most competitors aren't a good fit," Lastminute's Virden says. "We will not buy companies that we then have to overhaul completely." The acquisition has served to heavily tip the balance toward Paris in the competition between the French and German operations - a rivalry that almost inevitably arises in the course of Pan-European expansion. "The center of gravity in Lastminute just moved eastward," says Stephan (TSC) Uhrenbacher, co-managing director of Lastminute Germany, referring to the Dégriftour deal. "But not eastward enough for me."

While Lastminute struggled to staff its faltering operation in Sweden - the last of the three countries in its first round of expansion - the company moved into Spain in April. Within the travel industry, Spain is commonly called an "incoming" country, meaning that there are more foreigners visiting than citizens going abroad. In fact, entire towns are known as being "German" or "Brit" tourist colonies. Thus, Lastminute's strategy hinges more on creating a new Spanish "supply" for all other Lastminute sites than on selling to Spaniards. By setting up local operations, the logic goes, Lastminute will be able to secure more, and better, offers for all its country sites. Which is not to say that Lastminute doesn't expect Spanish revenues; after years as an Internet also-ran in Europe, Spain's cyberculture is starting to take off.

But Lastminute is having a tough time taking off in Spain because of bad coordination between headquarters and the local outfit - a typical issue for expanding companies. Considering the frustrating summer he's had, Lastminute Spain's Managing Director Alfonso Castellano, a former star at travel giant TUI, is relaxed and amiable as he recounts his problems with the London office.

Having rapidly ramped up Lastminute Spain to nearly a full staff, Castellano planned to go online by May. But then he learned that all his hustling would not immediately translate into a Spanish Internet presence. The launch was stalled, pending completion of Lastminute's technology for its version two, or V2, site. Estimated by analysts to have cost $14 million, V2 offers new interfaces, back-end efficiencies and personalization. But it did not debut until late August, and then only as a standalone version for Lastminute Australia (a joint venture with Travel.com.au). By late September, V2 was still in testing before worldwide implementation. "Trying to move from V1 to V2 on a live site like the U.K.'s, which gets millions of users a month, is like changing airplanes midflight," Virden explains. "You try to schedule a technology such as V2, but you can't really say anything for sure until it's done."

Had he known how long V2 would take, Castellano would have launched last May, on the Version 1 platform. At the time Lastminute Spain would have been a first mover in the local online travel market. But while V2 was in testing, competitors eDreams and Travelprice launched local sites. "You can use V2, you can 'touch' it and it works fantastically," Castellano says with frustration. "But the technicians keep saying it can't handle the load yet. Since June, it's always been 'two or three weeks' away."

As Castellano waited for V2 to arrive, wired Spaniards turned to the other travel sites. In time, it became clear that the summer season would be a washout for generating Spanish revenue. (Holland and Italy, also stuck behind V2, are less far along in their development, so in both cases the lost potential sales were much smaller.) In fairness, however, the summer hasn't been a complete disaster for Lastminute Spain - Castellano crafted a successful "Viva Espana" page that offers Spanish hotels, events and goods for inbound tourists on all the active Lastminute sites.

Still, one senses a restlessness in the Barcelona office, akin to the energy and anxiousness in a locker room before a championship game. All the players have been trained. They've internalized the game plan. But no one can tell exactly when the match will start. Castellano's generally upbeat these days, confident that the V2 launch will rocket Lastminute Spain to success. "Now we see the light at the end of the tunnel," he says, then adds, "I just hope it's not a train coming the other direction."

Today, with their European beachheads established, Hoberman and company co-founder Martha Lane Fox are convinced the Lastminute concept truly has global appeal. Beyond Europe, however, they've moved toward the joint-venture model, already partnering with heavy-hitters such as Travel.com.au in Australia and New Zealand as well as South Africa's Tourvest. From a management perspective, says Virden, wholesale startups of companies in such faraway locales would have been agonizing. "We're near Europe, so we can do those from here," he says. "Outside of Western Europe, you're looking at joint ventures only. You get up to speed so much faster. Are we ever going to have a Lastminute Iceland or Lastminute Uruguay site? There's a real diminishing return to that sort of expansion." For him the crucial factor is the size of a country's e-commerce market. If it's only in the hundreds of millions of dollars, Lastminute won't be spending much of anything there.

When you look at Lastminute's torrid year of expansion, one question looms: Was it worth it? Absolutely, says Hoberman. He touts new metrics from NetValues, a French company that measures Web traffic: Lastminute's sites have scored first in online-travel traffic for Germany and the U.K., while Dégriftour's two sites and Lastminute France have taken first, second and fifth place in France. Plus, V2 has been running since August on Lastminute Australia - just in time for the Olympics - setting first-month sales records within the company.

"If anyone has a chance at expanding across Europe, it's Lastminute," says Fitzpatrick of Lehman Brothers. "For those other companies that have to deliver physical fulfillment, it seems like a more hopeless task."

The company's deep cash reserves also help, says analyst Phil Clark of Goldman Sachs. "They know no one is going to get funded as a competitor," he adds, referring to the tight market. "So they can expand with an eye to profitability, whereas six months ago they would have tried to just develop as fast as possible."

But the localization effort has been expensive. During the year since it launched its first sites outside the U.K., Lastminute's operating cost is projected to have risen from $6.7 million to roughly $60 million (with the largest increase coming in sales and marketing, expected to rise from $1.7 million to $27 million). The question now for Lastminute is whether its expansion-country operations can produce the revenue to offset their bloating effect on the company's burn rate. Total revenues were projected to increase from $300,000 to $4.5 million over the same period, though as of June non-U.K. revenues made up only 11 percent.

The U.K. can't bear the weight of the worldwide operation forever; the other sites have to make money. Hoberman says revenues have jumped significantly in France, Germany and Sweden - though Lastminute declines to break down sales figures country by country. The Dégriftour acquisition is also expected to push revenues up and losses down.

For Lastminute, perhaps the biggest localization move of all awaits: trying to crack the U.S. market. Given the size of the U.S. e-commerce space, Lastminute naturally wants a piece. But using the local-startup model would be expensive, in essence it would mean betting the entire company on succeeding in the U.S. market; and Hoberman's not playing double-or-nothing with the company. Meanwhile, LastMinuteTravel.com is already operating in the States, a situation that echoes the U.K. company's mindshare problem in Germany. "If we go to the U.S., we'll only do it with partners," Hoberman predicts. "Then we could do it in a low-cost way. But right now, it's Europe and Asia that are taking off, so that's where we'll spend our money."

U.S. Internet Companies Fan Out in Europe

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*In Millions. Source: Companies Listed

LASTMINUTE AT A GLANCE

CEO: Brent Hoberman

HQ: London

Offices: Amsterdam, Barcelona, Milan, Munich, Paris, Stockholm

Founded: April 1998

What they do: Last-minute flight, hotel and restaurant reservations, package tours, gifts, events

Employees: 300

Q3 2000 Losses: $13.4 million

Q3 2000 Revenues: $12.8 million

IPO: March 13, 2000

Offer Price: $30

Stock History: High, $46.50; Low, $8.75; Now, $11.13

Source: Lastminute.com

Marc Spiegler writes from Zurich about the European Internet Economy.

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Glocalization: Easier Said Than Done