Analyzing and Selecting International Markets
There are many questions to ask before you spend time and money seeking a license for a country and certainly before you make an agreement.
By William Edwards, CFE
You have made the decision to expand your franchise into other countries. You believe there is a niche for your brand outside your home country. Your franchise is doing well at home and your training, support, intranet and marketing resources for franchisees are well developed.
You have lots of leads from various countries but you have limited resources to pursue licensees. You want to focus on countries that have the highest potential return on investment for your franchise. How can you rank other countries as places to succeed for your specific franchise?
Our experience working for over 40 U.S. franchise brands as franchisors, international licensees and consultants in over 30 countries for more than three decades indicates that there are at least four major factors to consider when ranking countries for your franchise: Size of the consumer market for your brand, Differentiation, Risks, and Culture. There are many questions to ask before you spend time and money seeking a license for a country and certainly before you make an agreement.
When you enter a country it is essential to determine the size of the consumer market for your brand. Are there enough consumers with the cash — and desire — to frequent your franchise to make the units profitable? Do not go by population. Seek information on the buying power and consumer trends that can help you figure out how many consumers will want to and be able to buy your products or services. China has 1.3 billion people of which approximately 105 million are classified as upper middle class and upper class consumers. Also figure out where the those potential consumers are in a country. India’s 250 million middle class consumers are mostly in six cities in this very large country.
What is the buying power of the consumer in a country? In India it very low even in the middle class. McDonald’s has US $1.00 burgers. The average Big Mac, fries and diet soda meal in Switzerland was US $6.72 and in Shanghai US $2.16. On average, the same meal is US $4.80 in the United States, according to The Economist magazine’s Big Mac Index of 2015. Think about how product prices in a country will impact your franchisee’s profit and loss statement — and your resulting royalties.
A word about size. It will take you just about the same amount of legal investment (trademarks and agreement), licensee due diligence investment, licensee training and start-up investment for a small country as for a large country. New Zealand has 4 million people while Australia has 22 million. Ireland has 5 million while the United Kingdom has over 60 million population.
This is an area where many franchises do not spend the time to understand if they can compete in a country. Most likely there are already similar businesses in a country. How is your business different? How will your franchise attract customers of established similar businesses? Why would a licensee pay your up front fee and royalties when there are already other similar brands operating in their country? We see many franchises fail because they have not done the basic research to answer the differentiation question before seeking licensees in a country.
RISK: Economic, Legal and Political
Is the country’s economy growing, stagnant or declining? World Bank studies in recent years indicate that a developing country must have annual real GDP growth of 4 percent or more for there to be lots of new investment in a country. Your franchise will be a new investment by a licensee.
You will want to protect your intellectual property through trademark filings before you seek licensee candidates. How strong are the country’s IP laws? Can you feel comfortable that you can get your marks back and enforce your agreement? Is the law a level playing field in a country? What is the country’s history of protecting other brands’ intellectual property?
Determine the tax structure in a country up front and whether it is easy to take out fee and royalty payments. Many countries had a withholding tax of 3 percent to 10 percent on fees and royalties paid to you by your local licensee. Some countries have very difficult, costly and time consuming processes before you can take your money home. In some countries it can take four to six months to get government approval for payment of fees and royalties. Figure this out before you make an investment in legal, travel, training and support costs for a country.
It is really important to research the political situation in a country up front. A stable or fairly stable political situation means that laws and regulations will probably remain the same over time. Instability could mean that things will change so that you will have a hard time enforcing your agreement and getting paid fees and royalties. Be very careful of countries that are about to have major presidential or legislative elections because major changes could impact your licensee and your agreement. It is best to wait until after such elections to see the country’s direction going forward.
One of the most important and early questions to ask when considering a country is whether your product or service will sell there. And whether you will have to make changes to your product or service to fit into the local culture.
While you never want to change your franchise system, you may be required to make some changes to operate in a country. Food brands cannot use beef in India or pork in Muslim countries. Denny’s took pork off the menu in Dubai. Wendy’s has lobster and caviar burgers in Japan. U.S. food franchises all have pasta on their menu in the Philippines. Pizza Hut has rice on the menu in Asia. And dark chicken meat is preferred in most Latin American countries. The business model does not change but the product changes. This can be costly.
Sources of information
How do you find this information before spending time and money to seek a licensee for a country? Google appears to give you almost unlimited information, but is it reliable? Here are some sources we have used for years that have been proven valid on the ground in countries.
- Your legal, accounting and consulting service providers in your home country can be excellent sources of international knowledge through their information experience and their international contacts and offices.
- www.buyusa.gov: The official website for the U.S. Commercial Service. This organization has offices in all franchise-friendly countries and it exists to sell U.S. products and services. Download the country’s free Country Commercial Guide. Then contact the U.S. Commercial Service post in the capital city or your local USCS office in the U.S. for further help.
- The Economist and Financial Times websites which have an immense amount of information available on countries at. www.economist.com, www.ft.com, respectively.
- The World Bank offers lots of useful information including their Ease of Doing Business Index that measures how easy or hard it is start and grow a business in a country. Your licensee will be starting a new business. http://data.worldbank.org/indicator/IC.BUS.EASE.XQ
- One of our favorite sources of good, detailed information is the Fraser Institutes’ Economic Freedom Index that measures annually how free people are in a country to do such things as start a new business. https://www.fraserinstitute.org/studies/economic-freedom
Internet leads exciting but…
Finally, a word about leads that you receive through the Internet, your website or other sources. It is always exciting for a franchise to get leads from other countries where people are interested in becoming your licensee. Expect 90 or more out of 100 leads to be for a single unit franchise or to not have sufficient capital to be your country licensee. Expect 3 to 5 percent out of the remaining 10 percent to be initially qualified to be your licensee in a country. That is normal in the franchise business. Figure out how to quickly sift through the 90 to 95 percent that are unqualified before you spend any time with them.
William Edwards, CFE, is CEO of Edwards Global Services Inc. Find him at fransocial.franchise.org