International Franchise Opportunities
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Current Trends in International Franchising Along with Tips for Franchisors and Prospective Franchisees
“Isolation is not possible. Globalization is inevitable and beneficial.” – Rhonda Abrams in an USA Today editorial
The rate of international franchise expansion has increased steadily for over a decade. In fact, Franchise Times estimates that the average franchise system now operates at least 1 out of every 3 of its locations outside the United States.
Part of the reason for the push beyond U.S. borders is avoidance of stagnation. The U.S. is the largest – and most well-developed – franchise market in the world, and while it still has room to grow, it’s reaching a level of market saturation for a number of its industries.
Plus, it makes good business sense. By population, over 95% of the world’s potential consumers are beyond U.S. borders. Establishing an international presence is a great way for franchisors to stabilize profit and build opportunities for their franchise for years to come.
And it’s not just U.S. franchisors. Franchisors from countries such as England, Australia and Canada have also found a high level of success in expanding their franchise concepts around the world. So have franchisors from France, Spain and Germany.
Where are franchises expanding to?
For several years, the rage in international expansion for franchised and non-franchised businesses has been a block of countries known as “BRIC.” BRIC stands for Brazil, Russia, India and China. These four countries represent areas where a considerable amount of the world’s population resides (approximately 40%), and have room for major economic growth if proper infrastructure is built.
While growth has slowed noticeably from the double-digit annual growth these countries were posting a few years ago, the BRIC countries still hold power within the global economy – they’re simply too big not to.
Because of the nature of economics, it’s hard to speculate where the “best” places for franchise expansion will be. But, according to international franchising expert Philip Zeidman of law firm DLA Piper, “for a country to be appealing to franchisors one must also look for such earmarks as a growing middle class, increasing receptivity to western goods and services, transparency and minimal corruption.”
Areas that franchises have recently ventured on mission trips to scout potential in include: the Middle East (Qatar, United Arab Emirates, Oman and Turkey), Central America (Costa Rica, Guatemala and El Salvador), and South Asia (Thailand, the Philippines, and Indonesia).
What do franchisors have to keep in mind when franchising internationally?
Three main things franchisors need to consider when thinking about franchising internationally are: language, cultural differences, and the legal climate of the area.
Language is pretty simple to understand. Two parties have to be able to understand each other to communicate. For instance, here’s an example recounted by Franchise Direct Managing Director Sean McGarry, “Often you get a franchisor that says ‘I’m going to go into this market. I’m going to go into Europe.’ And we say, ‘Well do you have anyone who actually speaks French?’ And they say, ‘No, we don’t.’ And we say, ‘Is there anyone who could respond to this inquiry in their language?’ And they say, ‘No, they better speak English.’”
The example above is not the attitude you want to take into a new relationship you’re hoping to profit from. It will turn potential business away from you before you even have a chance to sell.
Secondly, first-time international franchisors must also pay close attention to the culture of where they want to expand to. A product that might work in one might not work in another. For example Dunkin’ Donuts, which is obviously famous for donuts, had to completely adjust its menu to get a foothold in India. In India, the menu at Dunkin’ Donuts looks more like an American McDonald’s or Burger King with multiple burgers – and all are beef-free, because most Indians don’t eat beef.
It was a necessary move for survival. As one Indian Dunkin’ Donuts customer said, “I don’t think anyone would come just for a doughnut. My grandmother only recently found out what a doughnut is.”
Another factor to consider is legal differences. In the U.S., franchising is highly regulated. In many other countries, where franchising is comparatively new on the scene, the laws aren’t as developed for what can be considered a “typical” franchisor-franchisee relationship. Not to mention the general business law differences from country to country.
The most important thing franchisors need to do legally when entering a new country is consult with a knowledgeable trademark lawyer and protect their trademarks. They are what makes their franchise unique.
The Use of Master Franchisees
Because of the language, cultural and legal differences, several franchisors forego expanding into new countries using the standard franchisor-franchisee relationship. Many internationally operating franchisors have found the best way to enter new countries is through the use of a master franchisee.
A master franchisee or master licensee, also sometimes called a sub-franchisor, is someone who pays the franchisor for the rights to develop a certain number of franchises an agreed upon area. The master franchisee does this by recruiting unit franchisees into the system, and acting as the immediate report for those franchisees.
In exchange for taking a great deal of the load off the franchisor in developing the agreed upon area, master franchisees 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 helped numerous 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.
“For some companies, they will set up an office and do [find franchisees] directly,” according to Sean. “But many wouldn’t have the resources for that, so they tend to go with a master license.” The decision of who to partner with is critical for franchisors. “If [the partner 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.”
8 Additional Things for Franchisors to Consider When Going International
Here are some tips from Philip Zeidman on what franchisors should do to make their international franchising a success:
- Make sure your house is in order at home.
- Don’t begin to expand until you are satisfied that it will not drain away so much of your resources that you cannot continue on a clear growth pattern in your home market.
- Be sure you know what the market is for your products and services, and whether there is a demand for them in markets other than your own.
- Identify those markets which are most likely to be receptive, and begin there.
- Have as clear a business plan as possible, rather than simply responding haphazardly to expressions of interest.
- Make sure you have adequate capability to undertake this quite different set of responsibilities than those to which you have been accustomed.
- Give a lot of thought to how you will structure your arrangement, which may not necessarily be the same as you have been accustomed to doing.
- Finally, and most importantly, do your homework. Then go back and do it again.
5 Tips for Prospective Franchisees Regardless of Residence
Some advice from Sean McGarry for those looking into the possibility of franchise ownership:
- Take a close look at the track record of the franchisor.
- Figure out how important brand equity is to you. Do you want a younger brand that isn’t as popular, banking on future growth prospects, or do you want a more well-known brand?
- There are thousands of franchise brands out there. To narrow down your options, look at the fit between you as a person, what your aspirations are, and what you like doing.
- Go out and visit multiple units of that franchise that are already in business around where you live before finalizing a decision, if possible.
- Seek advice from outsiders, ideally an accountant and a lawyer with franchise industry experience, for their views on the franchise agreement before signing.