Franchising World June 2007
The continent is officially open for business.
By John Sotos and Sam Hall
n a lighter moment during the recent franchising conference held in Rabat, Morocco, one presenter displayed photographs in quick succession to demonstrate the illustrious pedigree of Egyptian franchising, the Great Pyramid of Giza, the Mayan and Aztec pyramids of Mesoamerica, the glass pyramids of the Louvre Museum, and the pinnacle-shaped Luxor Hotel of the Las Vegas Strip. While these monuments may not be the product of franchising antiquity, this reference captures the entrepreneurial spirit and aspirations of participants at recent franchising conferences held across the African continent.
One sign of this groundswell of franchising activity is the emergence of franchise associations in many African countries. (See Chart 1) These associations share the common objectives of promoting franchising in Africa as a viable business model, bolstering intellectual property protection, stimulating investment, and lobbying for legislative reform.
Franchising is in its nascent stage in many African countries, with the notable exception of South Africa, and increasingly, Egypt and Morocco, where more than 200 international franchises successfully operate in a market estimated at more than $300 million for food franchises alone, according to the U.S. and Foreign Commercial Service and the U.S. Department of State. In Nigeria, food franchises have grown at an average annual rate of 40 percent. The U.S. Commercial Service has described this expansion as “explosive.” The Moroccan Franchise Federation estimates that the number of franchise systems in that country has grown by an average annual rate of 24 percent over the past 15 years, with the clothing and undergarment industry representing almost one-third of the franchising industry in Morocco. In addition to the relatively higher levels of per capita income found in Morocco and Egypt (See Chart 2), and the active embrace by these countries of the tenets of economic liberalism, a key aspect of the future success of franchising across Africa is the educational role of franchise associations. This past year has been promising in this regard with a number of franchising conferences held across the continent.
Stimulating indigenous operations
While African countries will continue to host a number of successful international franchise systems, a recurring theme at these conferences is how to stimulate indigenous franchise operations and emulate the successes of local systems such as Nigerian eatery Mr. Biggs and the Kenya-based bar and restaurant chain Kengeles.
The lack of financing for entrepreneurial endeavor remains one of the chief obstacles to a more prominent role for local franchise systems. While start-up capital is available from institutions such as the International Finance Corp., the private-equity division of the World Bank, and private bodies such as South Africa’s Business Partners Limited and the franchise funding initiative of the chartered South African Bank, the solution to the funding of small- and medium-sized enterprises often requires national economic reform.
Egypt provides an interesting example of legal reform creating alternative means of financing. In 1995, Law No. 95 formalized the concept of leasing in Egypt. The ability to lease business assets and schedule flexible payments has lowered the barriers to entry into franchising faced by the prospective entrepreneur. More recently, Egypt passed the Small-and Medium-Enterprise Law which establishes funding for SMEs in concert with the Social Fund for Development.
Attracting foreign direct investment by multi-national franchise systems also requires a supportive legal framework which does not unduly inhibit the repatriation of returns on investment, including royalties, franchise fees and intellectual property revenues. These restrictions are unlikely in countries that maintain sufficient foreign currency reserves. Botswana, Senegal, Tanzania, Egypt and Morocco are examples of countries that have liberal repatriation policies.
Discouraging franchise development
By way of contrast, the Tunisian government discourages traditional franchise arrangements with foreign companies and has actively blocked the introduction of particular franchise projects. In fact, a review of Tunisia’s franchising environment conducted by the U.S. Commercial Service concludes: “For the time being, U.S. companies should consider the Tunisian market closed to classic franchise operations requiring the export of royalty payments.” Algeria is another country that has historically-restricted capital flows to the detriment of prospective franchise companies seeking to conduct business in a region that benefits from a relatively-high level of per-capita income and a youthful population. These restrictions, however, may be loosened with the increasing number of international franchise systems that have recently opened shop in Algeria, the majority of which originate from France. Other signs that Algeria is at a turning point of greater acceptance for franchising include the successful conclusion of the first franchise fair in Algeria in February 2006, inaugurated by the Algerian Minister of Trade. This conference saw the birth of the Algerian Franchise Association. Additionally, trade liberalization continues in tandem with talks on the accession of Algeria as a full member of the World Trade Organization.
National receptiveness to franchising need not be predicated on specific legislation governing the relationship between franchisee and franchise system, such as exists in many North American jurisdictions. However, as the history of franchising in these more developed economies illustrates, formalizing rules on disclosure obligations of the franchise company and creating a statutory obligation to act in a commercially reasonable manner, addresses some of the pitfalls traditionally associated with an unregulated franchise industry. No countries on the continent, including South Africa with its stalwart franchise economy, have introduced specialized franchise legislation. Franchise associations, such as the Egyptian Franchise Development Association and the Franchise Association of Southern Africa, play an important role in promoting compliance with codes of ethics and best practices, including those governing disclosure obligations and the resolution of franchise disputes. Enforcing compliance requires revocation of association membership when members flout convention or commit abuses.
Another path to establishing industry norms has been suggested by the Kenya Franchise Association, which has argued for a National Franchise Development Committee in that country made up of representatives from the Kenyan government, the African Development Bank and the finance community. A similar drive to mobilize industry stakeholders is being spearheaded by The Tanzania Private Sector Foundation, a coordinating body of more than 120 private-sector associations in Tanzania.
As with other emerging markets, one of the challenges of franchising in Africa remains the strengthening of intellectual-property regimes so that franchise companies can transmit knowledge and franchise system concepts with the confidence that such know-how will be protected. Many African countries are members of the World Intellectual Property Organization and are Trade-Related Aspects of Intellectual Property Rights signatories, including Kenya, Tanzania, Morocco, Egypt, Botswana, Senegal and Algeria (a TRIPS observer). Increased capacity for regional enforcement of intellectual property rights will encourage the establishment of new franchises and the expansion of existing business through the franchise format.
The political shift in many African countries away from socialist governments, under which the state was the dominant economic actor, is an auspicious development for the future growth of franchising on the continent. Many of these countries have been freed from the yoke of central planning, with its traditional bias for big infrastructure projects, often executed to the neglect of the everyday needs of ordinary citizens. African countries are in need of many of the retail and service operations that exist in more developed regions. Car ownership (and related after-market business) is growing exponentially. The housing industry in many African countries is set for expansion. Algeria, for example, with a population of approximately 33 million people needs to build one million houses over the next 10 years.
Notwithstanding widespread poverty, many of these countries possess substantial middle classes; highly educated populations with exposure to the marketing concepts of more developed economies. North Africa, with its large francophone population should be particularly attractive to franchisors based in continental Europe and the Canadian province of Quebec. The pent up demand for everyday goods and services, delivered in a convenient and hassle-free manner, should overcome any linguistic or cultural barriers to franchising on the continent.
Africa is officially open for business.
John Sotos is the founding partner and Sam Hall is a student-at-law with the Toronto-based law firm Sotos LLP. Sotos can be reached at 416-977-0007 ext. 303 and Hall can be reached at 416-977-0007 ext. 305.