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Perspectives for the Franchising Sector in Europe–2006
Franchising World 2006
The synergy of mature franchise practice and an ever more integrated single market in Europe augur well for the continued expansion of franchising in Europe. By Carol Chopra
The Figures These countries are Austria, Belgium, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Italy, the Netherlands, Portugal, Slovenia, Spain, Sweden, Switzerland, Poland and Russia. The impact of this number becomes clear when compared to the figures of the U.S. market, traditionally home to the notion and development of franchising.
Territory
Population (2005 est.)
Number of franchised brands
The U.S. population accounts for 64 percent of the population of the European Union (of 25). he number of franchised brands in the United States is 23 percent of the total number of distinct brands in the EU, not taking into account that a portion of the distinct brands operating in Europe are of U.S. origin.
What do we mean by “franchising” when gathering our figures?
Business-format franchising necessarily comprises the following: The EFF stresses the importance of know-how and assistance as specific, distinctive and essential to business-format franchising. From the specifications above, it follows that the EFF excludes from its understanding of franchising, and therefore from its statistics, systems such as simple licence agreements, co-operatives, and all systems which operate as networks, but which do not combine all of the elements described above, even if they call themselves franchises.
Some characteristics of the franchise community in Europe • Non-European brands come essentially from the United States, Canada and Australia. • The portion of non-European brands on a market varies between countries, the • U. K. the Scandinavian countries, and the new EU members being the current favourite markets of U.S. brands. • When “going international,” national brands from Continental Europe tend naturally to first expand into their bordering neighbours. The U.K. and the Scandinavian countries with their traditional commercial ties, easily “export” their franchises to one another. • Exports beyond neighbouring countries are either the result of a determined strategy (China, the Gulf States in the Middle East, for example) or, as is often the case in franchising, the result of an opportunity presenting itself. • The most common strategies for a Europe-based franchise to enter another European country are the following, in this order: • The most common strategies for a non-European-based franchise to enter a European country are the following, in this order: • The proportion of franchised brands in the sectors of retail and services varies significantly between countries in Europe. For example,
Business perspectives for the franchising sector in Europe: Linked to the realization of the EU Single Market The reality of a single market for the EU is still in the making. Its aim is to achieve the freedom to sell and buy goods and services cross border in a clear legislative framework, composed of either EU or national regulation, but without any duplication of national administrative or regulatory barriers over and above the main framework. The single market has been almost achieved in terms of the free circulation of persons and goods, and is now in the making for the services market. The EU draft Directive on Services is presently under close scrutiny of the European Parliament. Its original draft published in early 2005 contributed to a large extent to the social upheaval in certain countries in Europe which snowballed into a reaction by the populations of France and the Netherlands voting “no” to a distinct document, the EU “Constitution”, (mis)perceived to symbolize an EU focused on promoting legislation which would result in massive “social dumping,” largely to the benefit of the 10 new member states to the union whose social legislations do not provide the level of protection of the 15 pre-enlargement states. The Services Directive aims at facilitating the exercise of: • The freedom of establishment for service providers and, The directive foresees, however, derogations from the principles above for a certain number of categories of services. These derogations are still under review within the Parliament. They include areas which may already be treated under other specific EU legislation, or which are still not yet harmonized at EU level and remain the prerogative of national legislation.
The derogations to the Service Directive include: For this general scheme of things to be made operable, member states are going to have to exercise their respective supervisory responsibilities cross border, assist one another in the execution of these measures, which implies not only harmonizing a lot of regulation and practices, but also trusting one another in this communal effort. For franchising, the success of implementing the single market a step further will be providential in that it will significantly boost the multitude of existing brands in considering a much broader and more open market for their development. The corollary to this will mean that competition will become fiercer. This is why the EFF believes that those systems, in particular service franchises, which are solidly founded on the five constitutive elements of business-format franchising stated above will increase their chances of withstanding these winds of change.
Ethical franchising This approach calls for an enhanced role for professional codes of good business conduct as a form of self-regulation. The Service Directive cites such codes as one of the means of convergence of good practice to be brought to the single market of services, thus complementing regulation, be it at national or European level. The EFF is proud to have a European Code of Ethics for Franchising since 1972. In the 1980s, the EU and the European Court of Justice recognized the EFF’s Code as an example of its kind, both in its definition of franchising as in its guidance for responsible practice of this unique mode of distribution. The EFF’s Code is amended when necessary to fit the changes and evolution of franchising and its context in Europe. The code thus stands as a written testimony to the on-going and forward-thinking evolution that the EFF and its member associations bring to franchising in its development in Europe, and in particular, in relation to the evolution of EU legislation.
Synergy for Continued Expansion The great majority of these distinct brands are of European origin. They are used to operate in multiple, diverse and competitive business environments. Most of them have the business maturity to groom themselves for increased cross-border expansion. The open market is there. Consumers are hungry for brands and entrepreneurs for small-business formats, which offer a means to success in a market poised to spill over the boundaries of national frontiers. Commercial territorial rights, where they exist in franchise agreements, are going to have to be reassessed. Full and open provision of information, assistance and trusting relations are the foundations of ethical franchising, but are not exclusive to it. The Service Directive refers to these in a broader context. Franchises already practice them, particularly those that are members of the EFF’s national franchise associations. Therefore, the synergy of mature franchise practice and an ever more integrated single market in Europe augur well for the continued expansion of franchising in Europe.
A 2005 survey on franchising in Europe generated by the European Franchise Federation reveals that there are 6,500 distinct franchised brands operating in 20 different countries.
EU of 25 460 million 6437 (conservative estimate)
US 296 million 1500
The EFF refers to the commercial meaning of franchising as it is operated in the world of the distribution of goods and services. More precisely, the concept “business-format franchising” best reflects the type of business systems under consideration.
1. A brand name, whose rights belong to the franchisor, conceptor/developer of the business system;
2. The licences to use the brand name, granted to the franchisee by the franchisor;
3. A business system: a business concept which has been formatted and market-tested into a duplicable “value” package” which can then be sold to independent entrepreneurs keen on joining the brand network;
(The value of the package includes the transfer of the franchisor’s know-how during the term of the agreement, as well as his continued assistance.)
4. Payment by the franchisee of a “fee” for the benefits of the business system;
5. The investment in, and ownership of, the assets of the franchised business by the franchisee (source: Mendelsohn, “Franchising Law”, 2005).
• The greater portion of franchised brands developed and operating in Europe, close to 80 percent, are domestic brands, native to Europe. This is a revelation to most people, who on the one hand do not realize the actual volume and diversity of franchised brands on the market in Europe, and on the other hand, usually associate franchising to the United States’ best known global brands, and usually it’s “fast food” brands.
The franchising sector in Europe is vibrant and diverse. The figure above attests to this, although the reality varies significantly between countries. These differences can, to a significant extent, be attributed to the mentalities and education of each country with regard to the spirit of enterprise, and the degree of self-trust in launching oneself into independent entrepreneurship. The leading countries for entrepreneurial spirit and for franchising today are France, Britain, Germany, Spain, Greece, Italy, Finland and Sweden.
• The free movement of services without the prior establishment of services providers in the member state where the service will be provided.
The directive determines principles and mechanisms for these objectives to be achieved. These include such things as:
• Obliging member states to simplify all of their procedures and formalities required for the access to a cross-border service activity,
• One such simplification will be the obligation for member states to set up national networks of “single points of contact” for all of the administrative paperwork of future entrepreneurs. National networks of single points of contact will have to go online, and be interoperable with the networks of every other EU country. Furthermore, national requirements will have to be made available in all the languages of the community so as to ensure full, transparent and accessible information to all.
• Service companies seeking to establish themselves in a country will be submitted, in its exercise, to the legislation of that country. In order to set itself up, however, authorization schemes and regulatory measures that will have been complied with in the initial country of establishment should be made transposable to other countries of establishment without further impediment.
• Service companies not wishing to establish themselves cross-border, but wishing to offer their (temporary) services cross border will in principle benefit from the freedom of movement of their services. They will be submitted to the legislation of their country of origin, one of the founding principles of the directive.
• Matters relating to sectors of “general public interest”;
• matters relating to conditions of employment, health and safety at work, professional qualifications, social security, the conditions of employment and contractual obligations of workers;
• matters relating to contracts concluded by consumers.
Market economics, framework regulation and a good franchise business concept are not enough. An ambitious franchise concept must have an effective head office and back office support system with a long-term strategy and a publicized policy in favor of strong franchisor-franchisee relations.
The figure of 6,500 mentioned above attests to the diversity, vibrancy and efficiency of franchising as a strategy for the distribution of goods and services in the form of networked “business formats”.
