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Building an Empire Internationally

Franchising: Expanding your business globally in the right country, with the right people.

If you have a franchise system in place, your human and financial resources should be ready to go international and take your company to the next level. However, you do not want to reinvent the wheel or build your empire alone.

The general information provided here can be used in any country. Details about a few countries with good opportunities to expand are also provided, but keep in mind these are only examples.

Franchising, as you’re aware, is one of the best systems for expanding your business globally, but in the right country and with the right people. It is a marketing method, which has been called by many international business experts, “the greatest marketing strategy and tool ever created to grow your company in the international arena.” Money is important, but people are the key element to make it or break it.
When granting a territory, it is important to assess the financial and operational (human) capability of the prospective franchisee. The ideal area developer or master franchise candidate will have prior business or franchising experience, be reasonably well capitalized to develop the brand, and have local resources, personnel 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. Otherwise you will put your brand in a very difficult situation in this country and future countries.

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. This applies to any country, therefore management issues need to be sorted out before granting the rights to a specific territory. Often a prospective franchisee seems to have the financial capability, but lacks the management depth needed to develop a brand.

While international expansion is an avenue of growth for your company, remember the following when planning to expand your concept internationally.

1. Be willing to adapt your products or services to the local market conditions, such as by changing the menus to include popular local dishes. Sourcing locally can help in localizing products, as well as reducing costs for the franchisee.

2. Be ready to change your business model in some areas. Unlike in the 1970s and 1980s, international companies are not very interested in buying expensive franchises with no significant market presence in the region. They do not see any value in paying a high price for something that has no proven model locally. They would like some financial commitment from the franchisor.

3. Be prepared to establish a regional presence to develop and support your local business relationships. A twice-yearly visit from the U.S. headquarters is not enough. You will need to be on the ground and in constant touch with the local partner to understand the local conditions and fine tune your products and service offerings accordingly.

Examples of a few countries in which you can find great opportunities for your company include: Africa (some cities), Brazil, Chile, China, Colombia, Costa Rica, Guatemala, Indonesia, Japan, Jordan, Korea, Kuwait, Malaysia, Mexico, Omar, Panama, Russia, Saudi Arabia, Singapore, United Arab Emirates, United Kingdom and Vietnam. Here are details on five of them.

Panama

  • Has a population of around 3 million, mostly of mixed descent.
  • Economy is based on the canal and its well-developed service and banking sectors, which account for approximately 70 percent of gross domestic product. The country’s economy has traditionally been one of the most stable in the region, presenting a relatively high per capita income of around $US 5,000.
  • A relative economic bonanza has prompted the expansion of the modern grocery retail sector in Panama, which is more developed than in neighboring countries.
  • The Panama retail sector in the future is bound to continue growing and consolidating, as Panamanians improve their living standards. Following the Panama-U.S. Free Trade Agreement, further investment of U.S. retailers is expected, and thus the sector could experience a shake-up which would accentuate what is already a rather competitive market.
  • One of the wealthiest countries in Latin America; food sales account for just about 50 percent of total retail sales. Consumers have more cash to spend on non-food items, such as clothing and leisure products. With the economy growing reasonably strong and forecasts for an 8 percent to 9 percent growth in 2013 (Ministerio de Economia), retail sales are expected to continue experiencing a healthy growth.

Colombia

  • U.S. products enjoy a high degree of acceptance.
  • U.S. merchandise exports in 2012 were $12.5 billion.
  • Conservative lending practices lessened the impact of the 2009 global economic downturn.
  • Ranked 37th among 183 economies according to World Bank Doing Business Report.
  • Third largest population in Latin America.
  • GDP growth in 2009 despite global crisis and getting stronger in 2013.

Vietnam

  • GDP growth consistently above 7 percent and disposable incomes on the rise.
  • Fueled by a rapidly emerging middle class demanding quality products and services.
  • Franchise sector has grown 30 percent annually in recent years and is set to outpace that during the next five years.
  • The market is still small and competitive, but future is bright.
  • Best prospects include: QSRs, business services, health and nutrition, education and children’s services, health care, cleaning and sanitation, hospitality, beauty and convenience stores.

Indonesia

  • Since 1970, the local sector has grown from three firms to more than 278 foreign and 92 local franchises operating across a wide range of sectors.
  • U.S. franchises are highly respected and hold roughly 55 percent of the domestic market for foreign brands.
  • Indonesia is Southeast Asia’s largest economy and has delivered consistently high annual growth exceeding 6 percent in 2012 and 2013.
  • During the difficult global conditions of 2009, the country’s economy was among the top worldwide performers.
  • Key markets include: food and beverage, the sector with the greatest potential. Other high-potential sectors include education products and services for adults and children, business services and retail (specialty stores).

China (An opportunity for revenues, but with some challenges)

Advantages

  • A gross domestic product or GDP of nearly 10 percent annually.
  • By 2012, the number of franchises in the country exceeded 180,000 units (annual growth rate of 35 percent).
  • Franchises are expected to grow now that China is set to launch newly standardized franchising regulations.
  • There are about 1,500 franchise companies, local and foreign concepts, with 70,000 franchisees.
  • New prosperity has created a middle class that should hit 250 million people this year.

Challenges

  • Most of the population does not understand the products and services offered via international franchising or have a working knowledge of the franchising concept.
  • As a prerequisite to franchising a business in China, a company must own and operate at least two such businesses in China for more than one year.
  • Franchisors that designate a supplier for products or commodities for their franchisees will be liable to franchisees for the quality (or lack thereof) of the products supplied by those suppliers.
  • Franchisors must make written responses to prospective franchisees’ requests for information (earnings claims or business plans, or anything else related to the franchise).
  • Chinese franchise partners aren’t easy to find.

Recommendations

  • Register your patent, trademark or copyright in English and Chinese.
  • In Hong Kong, it is quick and easy to register a patent, design, trademark or copyright, with or without the assistance of an intellectual property consultant or lawyer. It is, however, essential to register both the English and Chinese versions under the name of the franchisor.

Every country is unique and will have great opportunities and challenges. n

Hair Parra is vice president of international development for Wing Zone Franchise Corporation. Find him at fransocial.franchise.org via the directory.

 

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