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Pret-a-TakeoverWhy foreign retail operations are moving in on U.S. consumers.

By Daniel GrossUpdated Saturday, July 14, 2007, at 7:26 AM ET

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).

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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.

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.

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Daniel Gross is the Moneybox columnist for Slate and the business columnist for Newsweek. You can e-mail him at and follow him on Twitter. His latest book, Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation, has just been published in paperback.

COMMENTS

Remarks from the Fray:

The answer to your question, Daniel, is: the current account deficit. The offset of that is increasing foreign ownership of US assets. Indeed, it is precisely the sale of these assets that finances our consumption binge. It is, therefore, our vast consumption that is responsible, ultimately, for all those foreign names.

Two minor points. First, I can testify from personal experience that France has dynamite health clubs. Second, maybe Daniel does not get into many service station rest rooms, but I do and I can confidently say that almost all of them appear to be, at best, from the Brezhnev era. Lukoil has, in this case, hit the market dead on.

--lloyd667

(To reply, click here.)

There's nothing weird or strange about foreign owned companies here in the US, most people aren't even aware they're foreign - BP is a good example. There's nothing wrong with those companies staking claims here in the US, their products can be just as good as a US product. There's nothing magical about merchandising that the US has the lock on the market.

But there is something to concern ourselves. The intrusion of more and more foreign companies signals the decline of America as a world power. Perhaps now we are more a world equal, but that is something we'll have to swallow along with our pride. However there are a few things that go with foreign companies that we need to be worried about. How do the host countries of those companies view industrial espionage? How do foreign company's labor laws compare with our own and how does that clash with our culture.

Foreign espionage is increasingly important, as not every country differentiates between company and country when it comes to spying. France and China both routinely steal secrets from other companies and apply them directly to their national security policy. Currency and economic strength is a security policy too. While that may not be very meaningful when talking about a coffee shop or gas chain, it becomes very real when discussing aerospace, industrial manufacturing, and software development.

Let's say a foreign firm wants to plop down a factory in the Midwest and start building say...tanks. Do we really want a company whose parent government will benefit by learning our technology building our defense products? Do we even want them involved at any level? Could you ever trust them, even if they did it through a partnership with a struggling American company?

That's just one hypothetical, and that isn't even the worst case scenario. China is the biggest and worst of all copyright and patent infringers. In capitalist societies corporations are relatively neutral entities whose loyalties are for whatever currency they deal in. That isn't necessarily true in socialist and communist countries.

We need to exercise caution as a country and not let the lure of profit or product erode our country's defenses. We may not be killing each other on the battlefield, but every country in the world is battling ferociously to undermine the others in a slow game of domination of politics and finances. The US was on top for a long time, but we over-extended ourselves and now the world has regrouped and is going for the throat.

--Eigenvector

(To reply, click here.)

(7/15)

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