The 7 key factors driving the success of Offshore Growers
In the first part of this series, we discussed the emergence of a new generation of Offshore Growers. So why have the Offshore Growers succeeded now when the past is littered with the failed expansion moves of Australian companies? What makes them different? What changed?
Based on our exclusive interviews with the CEOs, chairpersons, directors and founders of leading Offshore Growers, seven key factors emerged as being decisive in their ability to win in the world.
1. Tearing down tariffs – benefiting from globalisation
Australian companies have benefited from the globalisation and greater integration of the world’s economy.
In recent decades, Australia and many other countries liberalised trade by removing or cutting tariffs – taxes levied on imports -- and other rules that restricted trade.
Australia has become more integrated with the world economy and has boosted trade. Merchandise trade has risen from 26% of nominal GDP in 1986 to 31% in 2016.
Australia has 11 free trade agreements: China, Japan, Republic of Korea, New Zealand, Singapore, Thailand, US, Chile, the Association of South East Asian Nations (ASEAN) (with New Zealand), Malaysia, and Canada and Mexico (1).
That environment has made it significantly easier and cheaper for Australian companies to do business internationally.
Gains from trade liberalisation and tariff reductions are obviously threatened by the emergence of trade wars, particularly the US-China trade war launched by US President Donald Trump in early 2018.
But, despite that, most of the gains of liberalisation will be protected and continue to facilitate international trade and company expansion.
2. Technology opens a world of possibility
One of the major factors underpinning the successful international growth of a new generation of Australian companies is technology.
Technology enables businesses to build scalable platforms across borders, and at the same time drives better consumer engagement and operational efficiencies. Technology is also delivering Australian management greater control, connection and collaboration.
The key globalisation technologies include
- Cloud computing
- Telecommunications/video conferencing
- Online team collaboration tools
- IT-enabled business process outsourcing (BPO) .
- Analytics software
Technology is making successful global expansion from Australia possible because businesses can centrally control their global activities from Australia.
Lovisa, which launched in April 2010, now operates in 15 countries. Fallscheer remembers in the early 2000s doing global video calls. The sound didn’t work and the frames constantly froze. “Now it is so easy to communicate,” he says.
3. The quick brand building hit of social media
In the past if a company wanted to build a global brand, they would need to spend huge sums on advertising and support those efforts with a large local sales force.
But the Offshore Grower is tapping into the huge global audiences that social media offers.
The explosive growth of social media networks has made it easier for companies to leverage the viral network effects of platforms such as Facebook, Twitter and Instagram to drive brand recognition.
“A 20-year-old girl is inspired by the same global social media that other girls are around the world,” Lovisa’s Fallscheer says. “It is much easier to create a presence using social media and other forms of marketing. Once upon a time that was hard.”
As at July 2019, the world had 4.3 billion internet users; some 3.5 billion are active social media users. That represents 46% of the world’s population (2).
4. Bolder, younger boards that support offshore expansion
Many senior directors have fantastic experience and add significant value. But many have been burnt by the spectre of failed global expansion by Australian corporates like AMP and NAB. It’s not difficult to see them counselling against going offshore.
The Offshore Growers say a key to their success has been younger, more dynamic boards, with directors who boast international experience and are prepared to back it. They have the confidence to take on the world and win.
5. Laser-like value propositions
In the past, Australian companies expanded overseas with little competitive edge. It was expansion for expansion’s sake.
But the new generation of Offshore Grower has a laser-like focus on their value proposition and how it is going to solve the needs of their clients, especially overseas.
A2’s Babidge was very much of the belief his product, by removing the a1 protein, was going to benefit those who were milk intolerant.
While the Offshore Growers acknowledged and respected overseas countries and their differences, they understood that customers around the world often have quite similar needs.
6. A shift to organic growth – abandoning risky acquisitions
One of the biggest strategic shifts Offshore Growers have made is to expand offshore not through acquisitions, but organic growth: growing their own businesses in international markets.
They have learnt from the mistakes of the past.
“Most of the overseas mis-steps have been acquisitions rather than organic,” a2’s Babidge says.
Former Afterpay executive director David Hancock says the past model was “more buy than build”. For Offshore Growers it is now build rather than buy.
Kay says that organic growth is a “measured” way of going global.
Lovisa’s Fallscheer says they key is to “move in slowly and allow yourself to learn from your mistakes.” He says the biggest mistake going global is “letting ego get in the way”.
“It’s not about flagship stores,” he says. “You can’t take the eye off the end goal – profitability.”
One of the reasons Offshore Growers tend to favour organic growth is they recognise the value of their products and services. A2’s Babidge says the company believed it was unique so wanted to grow organically rather than being distracted with an acquisition.
Afterpay and Nearmap’s Rosenberg says that Australian companies often have clients in the Australian market who have an international footprint. Those clients often request the Australian company to expand offshore to service their other locations. This can help facilitate global expansion in a less risky manner given these clients can help justify the (often considerable) investment required for overseas expansion.
7. Adopting a test and learn strategy
Finally, rather than making all-out bets on global expansion, the Offshore Growers have adopted a ‘test-and- learn’ strategy that typically follows three main steps.
Firstly, they test their competitive advantage in the small open economies of Australia and New Zealand. “Australia is a good test market,” says IMF Bentham and City Chic’s Michael Kay. “It is easy to get around and communicate.”
Secondly, the Offshore Growers then pivot their businesses after learning from their mistakes in Australia. It is much easier to make mistakes and learn from them in Australia than in the US or Europe.
And thirdly, after testing and refining their model at home, the Offshore Growers then shift that model overseas.
More from this series
In the first part of our series, we discussed the emergence of a new generation of Offshore Growers.
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(1) Free trade agreements (FTAs), Australian Government Department of Agriculture.
(2) Global Digital Statshot, We Are Social/Hootsuite, published July 17, 2019
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Andrew has over 15 years’ experience in portfolio management of listed companies, stockbroking and economic analysis. Prior to co-founding Ophir, Andrew worked from 2007 to 2011 as a portfolio manager at Paradice Investment Management.