Expanding Your Brand in the Middle East: A Fresh Perspective
Depending on your own entrepreneurial zeal and strategic expansion goals, it may be an auspicious time to forge relationships with the new economic leaders in the region.
Franchising World January 2012
By: Bachir Mihoubi
These are indeed exciting times to explore franchising possibilities in the Middle East. The region is being reshaped politically almost on a daily basis. From a small city in Tunisia (not far from where I was attending a franchise show) a revolution ignited that has now led to the departure of four dictators and is forcing other Middle Eastern countries to either remove their leaders or retool their constitutions. This may be good news for franchisors looking to expand in a more transparent Middle East.
The Middle East has not always been a clearly defined region. One person’s concept of the Middle East is not necessarily another’s: the definition depends on where you live. For our purposes, the term “Middle East” refers to the Arab countries of North Africa (Morocco, Algeria, Tunisia, Libya, Egypt), the Gulf countries (Saudi Arabia, Qatar, Oman, Bahrain, the United Arab Emirates, Kuwait), Israel, Syria, Lebanon, Jordan and the non-Arab countries of Pakistan, Afghanistan, Iran, Iraq and Turkey. Let’s focus on those markets that are viable for franchising at the present time.
Recent political changes sweeping across the Middle East seem to be a result of a generational rebellion that is no longer content with the models of governance prevailing across the region. As news reports have shown, the frustration in the Arab streets of Cairo, Tunis and elsewhere is directed not only at the leaders, but also at what the leaders stand for: unaccountable authority. These cascading events and their torrent of anger and discontent have done away with dictators from Libya, Tunisia and Egypt, and the wave may also soon dismantle the ruling regimes in Syria and Yemen. Other governments in the region, such as Morocco and Jordan, have opted for swift constitutional reforms to separate the monarchies from the political affairs of the country. It is difficult to predict the political spectrum with certainty, but it does not appear that the world will inherit countries that look like Poland or the Czech Republic after the fall of communism, but rather governments that look more like Turkey or Indonesia. If that is the case, the Middle East may inch closer to the West economically. These countries, if proven stable, may be more suitable commercial partners.
Linguistic and Cultural Considerations
Although many international prospects speak English, most people prefer to express themselves in their native language, and it is therefore polite to apologize for not speaking the local language. Even within a country, more than one language may be spoken. In most Arab countries, classical Arabic is limited to formal communications and each country speaks its own local dialect. In North Africa, most business people speak French; in the rest of the Arab world, unless one is dealing with traditional Arabs, most executives are very familiar with English, and new leaders in Libya and Tunisia were educated in the United States and the United Kingdom.
To avoid huge marketing mistakes, make sure to ascertain the meaning of a trademark in the targeted country. A number of brands operate under a different name internationally to avoid offending local consumers. For example, the concept of an eatery called “Church’s Chicken” did not translate well in the Middle East, so “Church’s Chicken” became “Texas Chicken.”
Most Americans rely heavily on contractual relationships, sometimes to their detriment internationally. In most Middle Eastern countries, people conduct business based on relationships and trust rather than relying on a contract. Companies should consider a transparency spectrum when determining how to negotiate business transactions internationally. For example, in highly-transparent countries such as Singapore, Australia, the United Kingdom, Switzerland and New Zealand, it is best to focus on the specifics of the contract and provide detailed information when negotiating with prospects or their attorneys. However, in most Middle Eastern countries, as well as Latin America and China, it is crucial to focus on building a solid relationship. Legal systems also vary from country to country. Although the common law system is used in the United States, Middle Eastern countries rely mostly on civil law, Shari’a law and Talmudic law.
While most countries in the Middle East have not adopted pre-contractual disclosure laws, many of them have “soft” franchise laws that afford the franchisees many protections. Agency laws in the Arab world can be burdensome when a franchise contract does not specifically avoid an agency creation. If it is determined that an agency relationship has been created, franchisors may fall in the trap of not being able to terminate franchisees without cause or without compensation.
In the Middle East, the preferred franchise structure has been the master franchise agreement. However, the area development structure has also been relied upon by many experienced franchisors. It is also possible to opt for a hybrid arrangement, which begins as an area development agreement and evolves into a master franchise structure. It is necessary to emphasize that in drafting these agreements, the fundamental obligations of the franchisee and franchisor must be maintained. Ordinarily, the master franchisee is granted the rights for a specific territory and a specific number of units to be developed. The franchisee is also given the right to sub-franchise the concept to other franchisees. An area developer, on the other hand, is granted a territory and a number of units that the franchisee must develop on his own, without the right to sub-franchise to third parties. A hybrid structure allows an area developer to develop a certain number of units before acting as a master franchisee and then sub-franchise to others after undergoing a thorough operations review.
In each structure, the franchisor grants the right to use the trademarks, know-how, confidential information and copyright material. The length of the term for which the rights are granted must also be specified. In countries where local bureaucracy and real estate issues may be time consuming, it is highly recommended to grant a longer term to provide the franchisee the opportunity to develop the concept.
When granting a territory, it is important to assess the financial and operational capability of the prospective franchisee. The ideal master franchise candidate will have prior business or franchising experience, be reasonably well capitalized to develop the brand, and have local resources, personnel and or experience in real estate, financial matters, and training and education. Many franchisors have found themselves contractually obligated to a franchisee who was unable to develop the entire territory granted in the agreement. It is critical to assess the potential of the territory and match it to the capability of the franchisee. For example, a prospect from Kuwait may not be able to operate easily in the five other Gulf countries due to logistical challenges and lack of local knowledge. Most importantly, and with Middle Eastern prospects in general, there are management issues that need to be sorted out before granting the rights to a specific territory. Often a prospective franchisee seems to have the financial capability, but lack the management depth needed to develop a brand.
The Middle Eastern countries provide great opportunities for U.S. brands. With a population of more than 250 million, a per capita increase in disposable income and a great demand for U.S. products and services, many American companies continue to expand successfully in these markets. Recently, Saudi Arabia qualified as 11th by the World Bank business rankings, ahead of more transparent European countries such as Finland and Sweden. In terms of priority and given recent events, franchisors should focus at the present time on the GCC countries (Saudi Arabia, Qatar, Oman, Bahrain, the United Arab Emirates, and Kuwait) where the demand and success of U.S. brands has been proven over the years and where political stability seems to have prevailed. Qatar, for example, boasts a GDP per person of $80,000 plus in terms of purchasing power parity. Turkey should also be a target; its economy has survived the global economic crisis relatively unscathed, and Turkey’s GDP growth rates stood at 10.2 percent in the first half of 2011 and 9 percent in 2010. In addition, Turkey’s unemployment is reasonably low and its budget has begun the year with a surplus. With a population of 74 million, half of which is under the age of 29, many U.S. brands continue to do well in Turkey.
Depending on your own entrepreneurial zeal and strategic expansion goals, it may be an auspicious time to forge relationships with the new economic leaders in the region. As a matter of fact, I am attending franchise events in Tunisia and Morocco within the next several months. These events are organized for local entrepreneurs who are eager to develop U.S. brands. Under the previous regimes, entrepreneurship was frequently stifled by the inner ruling circle. There is a sense that future entrepreneurs will be able to maneuver more easily within a freer market without the murky relationships that discouraged U.S. brands from penetrating that market.
As Tunisia prepares to celebrate the first year of freedom from dictatorship, this small country may have paved a way for a more stable and transparent Middle East. Expanding your brand in this region may not only be viable, but could also translate into a successful franchise development strategy for the long term.
Bachir Mihoubi is president and CEO of the FranCounsel Group, LLC. He can be reached at 404-384-3317 or firstname.lastname@example.org.