Seasoned investors will know that compounding is the quickest way to grow your portfolio. Each year your portfolio makes a profit. You then reinvest that profit, and your returns increase year after year.
In the same way, companies know that the quickest way to grow is to invest your profits in expanding your company. Each year your profits grow, you reinvest again, and your profits grow again.
Making the leap overseas
If you are a retail chain, you expand until you have a presence across the country. And then you expand across the globe. This is how Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) has expanded. First it built its presence in the UK, dominating the UK retail space. But, at a certain point, the company realised that growth opportunities in the UK are limited, so it is expanding abroad.
Tesco is now one the leading retailers in South Korea, Thailand and Poland, and it has plans to expand in countries such as India and China. Already, its overseas business makes up nearly a third of company revenue, and a third of trading profits. This is likely to grow further in future years.
However, expanding abroad is not easy. A company needs to be able to translate its winning formula to a different country with its own unique culture, fashions and tastes. This is probably the reason why most successful retailers have a strong presence in their own country, but often no more than dabble abroad.
But if you can make the leap, and crack expansion abroad, then you could have decade after decade of growth, rather like a Unilever or Coca-Cola.
A uniquely British institution that sells well abroad
People often think of Marks & Spencer (LSE: MKS) (NASDAQOTH:MAKSY.US) as a uniquely British institution. In actual fact, M&S is one of the few British retailers to venture outside of the UK. It already has a substantial international presence, and last week the retailer announced its plans to further grow its company abroad.
It already has an oversea store estate of 455 shops, and it aims to open 250 stores abroad in the next three years. This means that by 2017 M&S will have as many stores abroad as in the UK.
Why is Marks & Spencer so successful internationally? I would say it is a simple focus on producing premium products with an aura of luxury, reinforced by a brand that is the epitome of Britishness. We in this country may not realise it, but Britain’s brand, in the form of names such as British Airways, Burberry and Marks & Spencer, sells incredibly well.
Chief executive Mark Bolland has aimed to change M&S from a very traditional and old-fashioned retailer to a company that has a growing multi-channel and international presence and is modern and innovative. And people are realising that the old story of Marks & Spencer as a company in decline is no longer accurate.
Profits are now growing, and the share price is now climbing. The 2014 P/E ratio is 14.5, falling to 12.8 in 2015. Personally, I rate the company a buy.