Why foreign retail operations are moving in on U.S. consumers.

Commentary about business and finance.
July 14 2007 7:26 AM

Pret-a-Takeover

Why foreign retail operations are moving in on U.S. consumers.

Filling up at a gas station in Pelham Manor, N.Y., the shocking thing isn't the $3.33-per-gallon price. No, it's the red Lukoil sign atop the cinderblock building. The Russian energy behemoth, which bought Getty in 2000, has transformed hundreds of Northeast outlets into Lukoil stations (417 at current count).

Americans generally display few qualms about buying foreign-made stuff. In May, imports outpaced exports by a whopping $60 billion. But we exercise more discretion with brand-name goods and services. Those that make it here tend to comport with American consumers' parochial sense of what countries are good at producing: electronics from Japan, Italian clothing, French wine. Indian luxury cars and Japanese wines are a much harder sell. Americans have also been slow to embrace imports in the immensely valuable realms of customer experiences, like retail concepts.

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But that's changing as globalization continues to produce ironies. Lukoil is one of several retail operations of unlikely provenance that are staking homesteads in turf dominated by U.S. brands.

Americans have long viewed Britain's food culture (potted meat, fish and chips, a national attitude of indifference) with disdain. But Tesco, Britain's dominant grocer, believes American shoppers will embrace its Tesco Express model—small, upscale stores peddling organics and prepared foods. This fall, the first Tesco Fresh & Easy neighborhood stores will open in Phoenix, San Diego, and Las Vegas.

Tesco is following in the footsteps of Pret a Manger, the sandwich shop that, despite its Gallic moniker, hails from ... London. At lunchtime, midtown Manhattan office warriors queue six deep, clutching organic chicken Caesar salads and roast beef and arugula sandwiches—all in biodegradable boxes. The food is free of chemicals or preservatives, and Pret's packaging is slathered with precious foodie rhetoric. The chain (13 outposts in Manhattan) aims to "pursue harmony and balance in the business of making and serving great food." Pret found it slow going in Manhattan when it first arrived in 2001 because "we could not find the source of very good, confident, strong-tasting ingredients," says Julian Metcalfe, the effervescent co-founder of Pret a Manger. (A Brit talking smack about the quality of New York-area food products is a little like a Yank denigrating the relative quality of British soccer.) Pret a Manger, expanding rapidly in Manhattan, has designs on Boston and Washington. "For us to have 50 in New York will be nothing," says Metcalfe.

Pret a Manger will have to open hundreds of shops in Manhattan to reach the saturation level of Starbucks, which has prospered by marrying a mythical Italian coffee culture to American industrial efficiency and can-do service. Now, it may face some competition from the birthplace of espresso. Italy is synonymous with slow food, lovingly crafted goods, and, to put it charitably, a less-than-frenetic pace of customer service. Yet Illy, the Italian coffee maker, this fall will open its first Illy Espressamente coffee bar in a Las Vegas hotel. If you're keeping score at home, that will bring the tally to: Illy 1, Starbucks, 9,814.

Gas stations, groceries, fast-food, and coffee bars are highly competitive businesses in which U.S.-based giants predominate. Taking on Mobil or Starbucks seems like a fool's errand. Yet this latest crop of immigrants isn't daunted. The United States remains the holy grail of consumer markets—302 million comparatively wealthy consumers, who are the reigning world spending champions. Plus, as U.S. firms have taught the world, the real money no longer lies in producing components and assembling goods: It lies in owning brands and intellectual property. Apple reaps immense profits by packaging a bunch of cheap components and selling them as the iPod. And American consumers have proved that, over time, they do embrace foreign brands—e.g., Toyota.

So what's next, a French chain of health clubs? Small-business loans from Chinese state-controlled banks, a sector notorious for poor risk management? Don't laugh. Last month, ICBC, China's largest commercial bank, applied for permission to open deposit and lending branches in the United States.


Chinese banks and British food purveyors must overcome steep cultural and commercial obstacles. Lukoil, 14 years removed from state ownership, has waded into an intensely competitive sector in which transparency, quality of service, and clean bathrooms are key brand differentiators. (Raise your hand if these are attributes that naturally come to mind when thinking of Russia's energy sector.) Judging by Lukoil's Soviet-style station in Pelham Manor, the new owners still have a lot to learn. The bathroom looked like it was last cleaned during the Brezhnev era.

Daniel Gross is a longtime Slate contributor. His most recent book is Better, Stronger, Faster. Follow him on Twitter.

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