What it takes to enter new markets

For companies with strong cash reserves or access to capital, today’s economic environment may offer promising opportunities to expand. In fact, 39% of middle market executives said they expanded into new domestic markets over the past 12 months and see more expansion on the horizon, according to The Middle Market Indicator, a recent report released by the National Center for the Middle Market (NCMM)¹.

 

With a majority of middle market companies reporting year-over-year gains in 2021, additional expansion activity included 55% of companies expanding into new markets with the introduction of new or improved products and services; and 26% adding a new plant or facility².

 

Still, it is important to lay the groundwork for expansion carefully. When expanding into new markets, successful entry requires a thorough understanding of a market, the potential competitive barriers and risks a company might face, and the tools to mitigate those risks. In the current environment, companies may need to develop a deep understanding of local economies, as well as public health and demographic trends.

 

How key economic indicators show a new market’s potential

 

 

Sources: Bureau of Labor Statistics, Investopedia, Bureau of Economic Analysis, OECD

 

Enhancing market research

 

Making an informed decision to enter a new market requires in-depth research into regional trends as well as trends affecting your targets — whether they are consumer or business-based — on a frequent and ongoing basis. Economic benchmarks such as jobless rates, housing starts, population trends, personal savings rates and consumer confidence can be telling indicators.

 

At the same time, businesses need to understand how those key economic indicators have influenced demand for their specific products and services historically and in today’s market. B2B firms may also benefit from analyzing trends among their customer’s customers. A wholesale manufacturer of high-end furniture, for example, would need to understand both trends in retailers’ behavior and the habits of the end-customer. Such an analysis could reveal a need to shift gears to, say, more moderately priced products. 

 

It is also important to consider whether changes in demand are short-term or long-term. An uptick in sales brought by a weather-related emergency like a hurricane may not endure as long as demand tied to ongoing circumstances, such as the coronavirus situation or inflation pressures. 

 

Assessing competition

 

No matter how much opportunity exists in a new market, it is essential to analyze the competition thoroughly. In today’s more global and virtual environment, potential rivals may be based both within your industry and target market — and in other fields or locations thousands of miles away.

 

Evaluating potential competitors’ financial might is essential, especially if rivals are bigger and have the muscle to withstand such tactics as a pricing war. It’s really important to understand the ‘What if?’ scenarios.

 

Bear in mind that your competition may arrive through the adoption of new and accelerating technologies. Consider whether you can take advantage of these technologies or if they may shake up your industry in a way that replaces your product or service.

 

Mitigating risk

 

As you consider entering new markets, it is important to evaluate your company’s internal capabilities thoroughly, making sure you have both the talent and operational efficiencies needed for success

 

For companies expanding into unfamiliar foreign markets, it may be especially important to find tools to mitigate risk. When dealing with new customers, offering financing terms may be risky. In those cases, companies can engage with financial institutions to mitigate risk through the use of commercial letters of credit. For example, a company entering new markets can avoid having goods seized at the border by securing or minimizing its payment risk by using trade financing tools such as letters of credit. 

 

Ultimately, businesses can turn to a variety of advisors for help navigating the risks involved in entering a new market. Apart from bankers, attorneys, and accountants, that might also include commercial insurance agents, economic development experts and public health officials. Understanding what’s happening to the health and wellness of the community you’re entering and how that could impact your ability to sell and recruit talent there is important. When you’re expanding into new markets, you can never have too much information. 

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¹ “Year-End 2021 Middle Market Indicators,” The National Center for the Middle Market, 2021.

² Ibid.