Is your franchise fit for Germany?
By Karin Weinzierl , Editor of Franchise Direkt
Even though the concept of franchising a business is not as widely known in Germany as it would be in the US or the United Kingdom, the franchising industry in Germany has grown significantly over the last decade. From 1998 to 2008, the total number of franchisors increased from 630 to 950 companies. During the same time period, the total number of employees working within the franchising sector grew from 250,000 to 450,000. This upward movement proves that the franchise industry in Germany still has room for further development. The growth rates in annual turnover for franchise companies in Germany looks equally promising. In 2009, the German franchise industry produced annual turnovers of around €48 billion. Compared to the 1999 figure of €19.4 billion, the whole industry has increased its turnover by 150% over a period of 10 years. 1
A survey was conducted in 2007 by Deutsche Bank, one of Germany’s biggest financial institutions, shows that, over the next five years, the expected growth rates for the turnover within the franchise industry will at least double the estimated GDP growth-rates for Germany. 2
Even though the most active franchise companies originate mainly from Germany and Austria, the market still offers opportunities for foreign franchisors. The success of companies like McDonald’s and ReMAX has shown the possibilities for foreign franchisors in certain sectors in Germany. The German Franchise Association estimated that the number of American franchises operating within the German market lies between 5 – 7% of the country’s total franchises.3
Franchising in Germany actively operates across 16 different industries, of which the professional services sector proves to be the most popular, as more than 50% of all franchises in Germany are linked to the trade of professional services. But equally, there seems to be some new possibilities for franchisors to get their slice of the cake.
What are the most popular franchise-industries in Germany at the moment?4
- Service Industry 50%
- Retail 29%
- Food and Hospitality 14%
- Small trade 7%
Other statistics show that, in some sectors, the number of service providers available is not sufficient to serve the growing demand. With an ageing population and a constant shortage of money within the German Health Service, the demand for alternative home-care solutions for elderly people is booming. This would be an excellent opportunity for franchisors thinking about expansion into Germany. Especially as projections show that the total number of people in Germany who will need professional care assistance might increase up to 4.6 million in 2050 .5
But even though there is huge potential in the market, there are some downsides to the German franchising business. One of the key points of every business venture is the availability of suitable financing concepts for franchisees. Given that the minimal investment for a franchise-business can be less than €15,000, a franchise might not be taken up because the potential franchisee does not have the means to finance the business. It can be difficult to get funding for a franchise business. Potential franchisees often had to organize their funding using a number of different financial institutions.
One of Germany’s biggest banks, Deutsche Bank, is trying to fill the market gap with a financing concept called FranchiseFinance. It is tailored towards the very special needs of a franchise business and can easily be customized to any franchise concept.
Once this problem is solved, the potential of expanding a franchise business into Germany will be considerably higher.
Another very important aspect of franchising abroad is the legal differences between the countries concerned. First of all, the franchise legislation in Germany differs slightly from the American system. A franchise disclosure law per se does not exist in Germany. Instead, we mainly rely on “Good Faith Laws”. The contracts used in the German franchise industry cover a wide range of aspects from different codes of law such as commercial law, company law, law of obligations, competition law and anti-trust laws. In addition to that, the German Franchise Association provides guidelines stating the required content of information within franchise contract. According to the German Franchise Association6, the current guidelines from 2003 are under review.
Thirdly, there are a couple of cultural differences that need to be considered when planning a business expansion. Small trade companies (e. g. carpenters, carpet-layers etc) are currently holding 7% of the total of franchises in Germany. Compared to the size of that segment in other European countries, this figure seems to be surprisingly low. The reason for this is that, in Germany, those professions are subject to strict Crafts and Trade Codes. Those rules limit the potential group of people who could even take up a certain franchise. Due to the nature of our education system, there are certain requirements that have to be met before somebody can run a particular business. Mostly, those requirements are related to individual qualifications. For certain types of businesses, an apprenticeship or a master craftsman’s diploma can be required. The franchisor needs to be aware of those differences so that he can avoid problems from the start.
1 All statistics according to the German statistics database www.statista.de
2 According to the Deutsche Bank Survey from 2007
3 Quoted from a statement from Torben L. Brodersen, chairman of the German Franchise Association
4 Statistics published by the Institute for Scientific Publications at www.institut-wv.de/index.php/1452/
5 According to a scientific publication by INSM at archiv.insm.de/Downloads/PDF_-_Dateien/Pflegemarkt_2050.pdf
6 Quoted from a statement from Torben L. Brodersen, chairman of the German Franchise Association