Going About International Expansion
As FOCUS Brands (Auntie Anne’s (#81), Carvel, Cinnabon (#54), McAlister’s Deli, Moe’s Southwest Grill, Schlotzsky’s) group president Kat Cole said at a spring 2015 conference, “Expanding your business into multiple countries is a brutal mirror of your strengths and weaknesses.”
For successful international expansion, a couple of those strengths must be flexibility and faith. Because of the language, cultural and legal differences between nations, several internationally operating franchisors must utilize master licensees to enter new countries.
Master licensees or master franchisees, also sometimes called sub-franchisors, are people who pay the franchisor for the rights to develop an agreed upon area. In exchange for shortening the learning curve for the franchisor in developing a specific area, master licensees are rewarded by retaining a significant percentage of the initial fees and royalties paid by the franchisees they recruit.
Since franchising works best when it’s localized, this method has really helped franchisors by utilizing the services of a business partner who already knows the area they want to expand into, and can assist the franchisor in finding qualified franchisees at the single unit level. Of course, entrusting the concept they’ve worked so hard to develop to another party can be difficult for franchisors, but the benefits can be great.
Take Sign-A-Rama (#46) for instance. The franchise, a part of the United Franchise Group (UFG), has been successful in France since 2002. Its success came from a lot of planning and a willingness to be flexible.
“We minimized a great number of potential hurdles because we selected excellent master license partners who are from France,” says Tony Foley, International Director for UFG. “[They] know the country and people very well as well as understand our franchise model very well. We gave them the freedom to ‘localize’ the brand and concept to fit French tastes and habits which proved to be an excellent decision.”
As you can imagine the decision of who to partner with as a master licensee is very critical. “If [the decision is] good, they’re going forward, but if it doesn’t work it can set [the franchisor] back in that country for a long time,” says Franchise Direct managing partner Sean McGarry.
And the same goes for international brands entering the U.S. market, he adds. “The scale of the U.S. market is such that the awarding of more than one master license should be [carefully] considered. California, for instance, has an economy the size of France. In some sectors of the economy, state laws can vary significantly, and having a master licensee who is familiar with operating in your sector at the state level can be of benefit.”
Where are Franchisors Looking to Expand Internationally?
Growth in emerging market and developing economies is projected to rebound in 2016. This reflects mostly a less deep recession or a partial normalization of conditions in countries in economic distress in 2015 (including Brazil, Russia, and some countries in Latin America and in the Middle East), spillovers from the stronger pickup in activity in advanced economies, and the easing of sanctions on the Islamic Republic of Iran.~ International Monetary Fund World Economic Outlook, October 2015
As the quote above notes, a number of Latin American countries are among the ones set for a rebound or continued growth. The IFA and Franchise Times already saw the area’s potential, setting up a 2015 visit to three countries in Central America.
In late summer, the U.S. Franchise Trade Mission took participants to Costa Rica, Guatemala and El Salvador. Franchises that went on the mission included Arby’s (#79), Berlitz Franchising Corp., Bonchon Chicken, FASTSIGNS (#90), Fuddruckers, Kona Grill, Mosquito Squad, Russo’s New York Pizzeria, Signal 88 Security, Sky Zone, Smashburger, Wayback Burgers and Xtreme Lashes. Here’s a snapshot of the three franchise markets.
The mission’s first stop was Costa Rica, which (along with Panama) is one of the best gateway countries to the region for international franchisors. The country welcomes more than one million American tourists each year – in addition to the estimated 100,000 American citizens that now make Costa Rica their primary residence.
Currently, there are 278 registered franchise systems in operation, up 4.2% from 2014 and up a staggering 85% from 2010. Here are some more fast facts on the Costa Rican franchise market:
- 78% of franchise systems are foreign and 22% are Costa Rican in origin.
- 51% of foreign franchise systems in Costa Rica are from the United States.
- 49% of international franchises are run by master franchise license, 34% by regional franchise license, and 17% by individual franchise agreements.
- The food sector dominates with 59% market share, followed by specialized services with 21%
- 13 Costa Rican franchises operate in 12 additional countries: Argentina, Dominican Republic, Peru, Ecuador, the United States, Guatemala, Colombia, Mexico, El Salvador, Nicaragua, Honduras and Panama.
- The graph below illustrates the initial investment levels for current Costa Rican franchisees:
If you would like to read Costa Rica’s 2015 Franchise Market Study, presented by the Chamber of Commerce of Costa Rica and the National Center for Franchising (CENAF) click here (note: it is in Spanish).
The most populous country in Central America, Guatemala has experienced dramatic franchise industry growth in recent years.
According to the Guatemalan Franchise Association, franchising in the country can be traced back to the 1970s. However, it wasn’t until the 2000s that the industry gained a foothold in the mainstream. Specifically, during the five-year period between 2002 and 2007 when the domestic franchise industry grew 1500%.
There are more than 200 U.S. brands currently doing business in Guatemala, combining for 1,500 units. The country is in the midst of some government instability, but Senior U.S. Commercial Officer Nicole DeSilvis assured franchise representatives on the mission trip that their companies’ business interests would be protected, and for most Guatemalans day-to-day life is business as usual.
She also added that the current U.S. Ambassador to Guatemala, Todd Robinson, is pro-business, which she says is a big help. “He comes on time (to her events), stays ‘til the end and works it,” DeSilvis said. “We’re here to tell the good story and Guatemalans are so proud of their country so to have someone who wants to bring business here is huge.”
Guatemalan franchise investors tend to favor U.S. franchises, and the area development (master franchise) model is the most often-used mode of expansion. A special note about the Guatemalan franchise industry is all contracts must be in Spanish to be legal.
As mentioned before, incoming franchisors must always take into account the culture of the country they are expanding into. El Salvador is a great example.
Restaurants in El Salvador tend to be bigger than in the U.S. “Dining out in San Salvador—the capital of El Salvador—is more than nutrition, it’s nurture,” says Franchise Times executive editor Nancy Weingartner. “Extended families go out together on weekends, and linger over their meal, necessitating more tables and larger restaurants.”
In addition, because of the country’s history with earthquakes and volcanoes, parents favor taking their children to play at indoor playgrounds. As a result, franchises you don’t usually see with play areas in the U.S. have them in El Salvador, such as Pizza Hut (#5) and Denny’s (#95).
To enter the El Salvadorian franchise market, extensive due diligence is a must. According to Marcella Romero, an attorney with BLP law firm, El Salvador isn’t for franchisors without significant international franchise experience. However, for those that have the experience, El Salvador has some features that make it a good market. One is that the United States is the country’s #1 trading partner. Also, U.S. companies don’t need to worry about exchange rate fluctuations as the U.S. dollar became El Salvador’s legal currency in 2001.
But the largest reason for American franchise success in El Salvador, according to consultant Luis Arturo Garcia, is El Salvadorians – a population of about six million – have about three million relatives who live in the U.S. These relatives collectively send close to $4 billion back to family members each year. If a person receives money from a relative in the U.S., his or her buying habits may be different from the mainstream, he says, because the relatives tend to suggest they try out new brands that have just come to the country.
One big issue looming over the industry is an upcoming decision on joint-employer status from the National Labor Relations Board, a case that explicitly involves McDonald's.
If the board ultimately rules McDonald's is a joint employer, American franchise corporations would be held accountable for what happens at their individual chain locations, potentially changing the way franchisors and franchisees interact with one another.
International Franchise Association president and CEO Robert Cresanti told CNBC in January that some business owners are already adjusting their business models in advance of any possible changes. But he remains bullish on the growth prospects for the franchise industry in 2016 saying, “[franchises] have cultures that tend to grow and rise because they meet consumer needs in various spaces, whether it's dog walking or hotels you prefer to stay at. As a function of that, it usually scales up.”