What's Next in China?
In recent years there has been a major push by major franchisors to expand their operation into emerging markets. At the top of that emerging market list for many has been China. With a burgeoning middle class, many business initiatives have been dedicated to making headway into the socialist nation. It appears western fast food and lodging services are among the industries that have been able to integrate into Chinese society with the successes of McDonald’s, KFC, Pizza Hut, Wyndham Hotel Group and others. But what other industries could find their way into China in the foreseeable future?
A number of people can probably remember an incredible story from August 2010 in which a traffic jam occurred on the Beijing-Tibet expressway that stretched more than 60 miles and lasted nine days before clearing up.7 This extreme instance is symptomatic of a simple truth: more Chinese citizens own cars now than in the past. At the end of 2009 there were 76 million cars and trucks on Chinese roads, and that number is expected to more than double by 2020.8 In fact, through substantial government incentives, China has experienced record auto sales and overtaken the U.S. as the world's largest auto market in the past couple of years.9
Even with analysts’ claims that car sales in China are set to slow down in the near future, all of these cars on China's roadways are going to need maintenance and repair eventually. The question is where will Chinese motorists seek these services? The answer could very well be auto repair franchises and additional related automotive franchises already operating in the U.S. and abroad.
The motor vehicle aftermarket industry includes the products and services purchased for vehicles after the original sale. These include replacement parts, accessories, appearance products, lubricants and service repairs. Franchises operating in this industry segment include:
- Transmission franchises
- Body repair franchises
- Windshield repair & auto glass franchises
- Automotive general repair franchises
- Oil change franchises
- Brake repair franchises
- Appearance franchises including bumper repair, paint chip repair and dent removal franchises
- Tune-up franchises
- Motor vehicle parts and accessories franchises
Which franchises could be a beneficiary of increased motor vehicle usage in China? The following chart showcases automotive-related franchises that are part of the Top 100 Global Franchises ranking this year:
Automotive Franchises in Top 100
|Novus Auto Glass||52|
*New to this year's ranking
Adding to the growth potential for these and other related companies is the Chinese market isn’t the only market that could be in for an increase in auto repair franchise services in the future. Other emerging markets, such as India which has seen a 23 percent increase in auto sales from the same time a year ago, have experienced a marked increase in motorists in the past few years.10
International expansion is such a major priority to franchisors that this year’s franchise spotlight focuses on two major franchisors that are pondering major moves to optimize their efforts in those initiatives.
Three years ago in 2008, Wendy’s (#25) and Arby’s (#50) merged to form the Wendy's/Arby's Group creating the third-largest fast-food chain in the U.S. Now the company is "exploring strategic alternatives" meaning company executives are open to selling off the Arby's brand. Why would they consider making such a drastic move? Simply put, Arby's hasn't kept up with its counterpart in Wendy's when it comes to providing customers with increased menu options, and maybe more importantly, the fast-food chain hasn't kept up in overseas expansion.
In a plan outlined in early March 2011, Wendy's/Arby's Group told of their plans for the immediate future, including a more varied menu and growth targets of 8,000 units with 30 percent of that growth coming from projected openings in Brazil and China and nine percent from projected openings in Japan.11 "Despite Arby's positive momentum, the reality is that the Wendy's brand, given its relative size and scope, is the key driver of shareholder return, and we believe we should focus on the execution of the compelling growth opportunities at Wendy's," explained Nelson Peltz the Chairman of Wendy's/Arby's Group when asked to comment on the move.12
Growth was also the main topic of discussion when YUM! Brands announced that it was seeking a buyer for their Long John Silver's and A&W brands. When the move was announced, YUM! Brands CEO David Novak explained that "[YUM! Brands does] not believe Long John Silver's and A&W All-American Food Restaurants fit into [the company's] long-term growth strategy."13
YUM! Brands is hoping through the sale of their two less profitable brands it can concentrate its efforts further in international expansion, particularly in China where they already have an edge over their nearest competitor, McDonald's, by more than 1,000 restaurants and is outpacing McDonald's in new development by a 3:1 ratio.14 According to YUM! Brands public releases, about 65 percent of the company's profits currently come from China and their other international divisions, and they expect that percentage to grow to 75 percent by 2015.
Both Wendy's/Arby's Group and YUM Brands are attempting to keep pace with the top two global franchises in Subway and McDonald's, which are not letting the foot off the gas, as evidenced by both companies announcing their own major international pushes recently in the Middle East and Russia, respectively.
Trends & Things to Watch
For several years now, investors have been pointing to South America as one of the potential next areas for economic development. The South American country being explored extensively at this point is the largest country on the continent: Brazil.
According to CNNMoney.com, Brazil is currently the eighth largest economy per GDP (behind the U.S., China, Japan, Germany, France, United Kingdom and Italy), and is expected to grow steadily over the next five years.15 When it comes to the catalyst for the advancement of its profile with foreign investors, Brazil has a large similarity to China. Like China in 2008, Brazil has been awarded the right to host an Olympic Games in 2016 (Brazil has also been awarded the right to host the 2014 World Cup), which has expedited capital improvements and aided in attracting more outside groups to seriously look at the nation for investment purposes.
While China presents significant obstacles to overcome to enter into business there - one of the challenges franchisors have faced in China centers around protecting their trademarks and intellectual property - Brazil boasts one of the more inviting investment climates for outside investors. Foreign investors (individuals and legal entities) can invest in most of the financial and capital market instruments available to Brazilian investors without any restrictions. The main provision to foreign investors is that they are required to hire local entities to act as custodian and representative for regulatory and tax related issues.16
Though there are risks to investing in any market, Brazil, with its abundance of natural resources and a younger middle class than many other nations, appears to be in position to join the world’s elite markets in the not too distant future.
Disasters and Conflicts
Business, like life, is unpredictable. And whether they are caused by natural or man-made actions, crises can alter the way franchises do business. Natural disasters such as the unprecedented earthquake and tsunami in Japan that occurred at the beginning of March 2011 exemplify this. Though the initial concerns and efforts are focused on the human toll of the disaster, as they should be, the economic impacts of the recent disaster can't be ignored. Many companies have had to place their expansion plans on hold in regards to the Asian country, or move forward with alternative plans. For existing franchises in the country, the situation is fluid as supplies are getting scarce and the government has had to take steps to preserve public safety, including rationing power because of malfunctions at several nuclear reactor sites. As the Japanese people recover and rebuild from the destruction, foreign companies will be presented with an opportunity to aid in the rebuilding through commerce. However in the meantime, franchise companies will wait for things to re-stabilize before continuing their efforts in branching out into the Japanese market.
Just as the U.S. economy is getting its legs under itself following the recession, uprisings in the Middle East are sparking uncertainty about how well the recovery will be able to sustain. Political conflicts in major oil-producing countries have already precipitated an increase to fuel prices. There are many theories circulating about what the possible extent of the rise in fuel prices will mean, but what cannot be debated is fuel prices affect all business industries. The tide of rising fuel costs also raises the costs of transporting goods, raises the costs of producing goods, and decreases consumers' discretionary income. What all of this means is if fuel prices continue their upward track consumers may fall back into their habits formed in the recession of cutting back on services franchises provide, and franchises may be faced with a decision to raise the prices they charge their customers, or absorb the production and transportation cost increases by way of a decrease in margin if possible.
The European credit crisis is eerily similar to the U.S. credit crisis of a few years ago, and is reaping similar consequences. Countries in serious difficulty include Greece, Spain, Portugal and Ireland and Belgium. There are a myriad of proposals being bantered around as potential solutions to the debt issues faced by financially-weaker members of the European Union. However, resistance to changing the current methods of dealing with the financial troubles from more solvent nations, most-notably Germany, is delaying the timetable for a resolution.17 As the credit crisis rolls on in Europe, the franchise market over there will reflect what it has looked like in the U.S. for the past few years: lenders restricting credit lines or in certain cases shutting them off completely. This would increase the difficulty of prospective franchisees obtaining funding resulting in fewer openings than desired and payment delays to franchisors and vendors by franchisees.