Perspectives in International Franchising
March 2011 Franchising World
Franchising Worldreaders will gain valuable insights on what it takes to create and maintain an effective presence in international franchising from two of the industry’s leading experts. DLA Piper LLP US Partner Philip F. Zeidman and MSA Worldwide Managing Director Kay Ainsley, CFE, answer questions that franchise professionals should ask when seeking to broaden their brands’ reach into global markets.
FW: What has been the biggest change you have seen in international franchising over the past 10-15 years?
Zeidman: Of the many changes, and there have been many, I would focus on four:
• Who’s doing it? Fifteen years ago only a relevant handful of franchisors, the giants, were meaningfully engaged in cross-border franchising. Today, any compilation will need to reach far down into the ranks. Among the top 200 franchisors in the United States, 32 percent of their units are outside the United States, a one-third jump in only 10 years. But consider that number 192 and number 175 on that list have 46 and 80 percent of their units beyond their homelands.
• Where? The days when “international” meant Canada and perhaps the U.K. are long gone. There is hardly a market in the world without a significant component of franchises from other countries.
• U.S. versus indigenous franchisors. Recent years have seen increases in the number of countries with homegrown franchisors, who may present the most vigorous competition for U.S. companies.
• The law. While there were a smattering of countries with franchise laws before then, the real increase has come in the 1990s and 2000s. Expanding internationally while “avoiding” those countries is no longer a realistic market strategy, or even an option.
Ainsley: Fifteen years ago, international expansion was largely driven by opportunism. A franchisor would receive a fax from someone in another country wanting their franchise and, without further thought, the franchisor was “going international.” While we still see some reactionary expansion, today more companies are making a calculated decision when they “go international.” They evaluate which markets to enter, the impact of international expansion on their domestic operations and their potential return, both short and long term. They also look closely at how they will support franchisees in areas of training, supply chain, IT, adapting to local market conditions and customs, maintaining quality standards and the enforceability of the agreement.
On the other side of the equation, I think those wishing to acquire franchise rights approach franchising in a far more sophisticated and organized manner. There are many more options from which to choose and they do their homework, conduct market research, run financial projections and seek professional advice before making a decision. The result is that both sides are better prepared to enter a franchise agreement.
FW: More franchisors are using area developers to franchise international markets. Why is that?
Zeidman: It can perhaps be explained, more than anything else, by a process of elimination.
At one end of the spectrum, single-unit franchising is pretty rare except in situations where the target market is contiguous or quite close. At the other end, joint ventures are probably unrealistic for a significant portion of franchisors (and may not even be legally permitted). For most franchisors, then, that points to multi-unit franchising. And, since master franchising is most attractive for certain kinds of products, services, systems and profiles of likely investors, the remaining strategy–area development–is appealing to a growing number. It has potent advantages, of course, but the choice may also be a function of rejecting the other options.
Ainsley: I see two strong reasons. The first reason is economic. There is a limit to the amount of royalty that an individual franchisee can afford to pay. When that amount is shared by the franchisor and master franchisee, neither may generate enough revenue to provide the necessary support to grow and manage the network. Second, the direct relationship between the franchisor and the area developer or multi-unit owner provides the franchisor greater control over their brand and lays the foundation for a stronger relationship. A stronger relationship, in turn, helps each side see the other’s point of view and work together to overcome any challenges in building the business. Having several area developers in a country also helps the franchisor spread the risk if an individual area developer does not perform well.
FW: What, if any, change in strategy have you seen by international companies wanting to franchise in the United States?
Zeidman: A healthier dose of realism. While the universe is still too small to draw sweeping generalizations, it seems to me that we see fewer today than we did of two characteristic figures:
• The foreign franchisor who, salivating at the population and disposable income in the United States, makes wildly unrealistic projections as to the numbers and speed of likely expansion, and perhaps entrusts the entire U.S. responsibility to a single developer or master licensee.
• The company which, having failed in its U.S. efforts, seeks to blame it on the U.S. franchise laws. Conveniently ignoring the likelier causes (inadequate market research, refusal to adapt, the daunting size of the market, entrenched competition, undercapitalization) will no longer fly. There may be many reasons why foreign franchisors fail, but franchise laws–which are applied even-handedly, without regard to the origin of the franchise–should not be one of them.
Ainsley: I agree with Phil. The U.S. market can offer great potential, but it must be approached with both adequate resources and realistic expectations. Foreign companies looking for a single master franchisee or 50 masters (one in each state) typically haven’t done their homework. There is no one strategy for entering the United States, but a successful strategy generally begins with looking at the country not as a single, homogenous market, but as a vast conglomeration of many markets. It includes starting where there is a favorable business climate, strong consumer demand and where support can be provided to franchisees efficiently–probably by opening a local office. The franchisor will also commit to the timeframe and marketing budget required to build brand equity and a loyal customer base. One tested approach is to become a strong regional brand and then expand across the country.
FW: What lessons have franchisors learned about entering a market with a master franchise that will make master franchising more effective?
Zeidman: I suggest three “lessons learned”:
• Pick the right master. While this seems almost ludicrously obvious, the failure to do so probably explains more below-expectation expansion than any other factor.
• The master must know how to identify, train, motivate, mobilize and supervise a range of different personalities and skill sets. It is, of course, helpful if he is himself experienced in the business of operating a retail unit, but it must never be forgotten: He is in many respects more a franchisor than a franchisee.
• In the early days of franchising, suggesting a prospective master who was or recently had been in another franchise was the kiss of death. No more. If anything, the exposure to the franchise system is today a prime attraction, overriding lingering concerns about “first love.”
Ainsley: I would suggest that past problems are not with the concept of master franchising, but the manner is which it has been executed. Certainly, as Phil stated, selecting the proper master franchisee is critical. I see two additional lessons that will improve master franchising. One is that in most scenarios the primary role of the master franchisee is to build and support a network of franchisees—to become the franchisor in their market. Yet, too many franchisors do not teach their masters to be a franchisor. They rely on their U.S. training program which centers on running a business unit. If master franchising is used, the franchisor should provide the proper training in franchising. In addition, the franchisor’s field staff should be able to provide support on franchising, not only unit management issues. Another lesson is that the economics of the deal must work for both parties. The days of the gianormous up-front fees are gone. Both sides are more realistic about their investment and their return. .