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Franchising: A Global Engine for Economic Growth

Are your target countries ready for foreign concepts? New survey says “Yes!”

By Edith Wiseman and Peter Schwarzer

 

Franchising has been growing worldwide. Global markets are receptive to the business model. Even more impressively, entrepreneurs worldwide are ready to start a franchise business, regardless of country-specific hurdles.

International expansion has become increasingly important for franchisors. Even established chains such as Wendy’s operate only six percent of their locations outside the United States. Compare this to McDonald’s, with more than 50 percent of locations abroad, and it becomes clear that having built an established domestic base does not mean being equally big abroad.

International brand strategy aside, the question franchisors need to ask themselves is whether the target countries are ready for foreign concepts. Based on a recent global survey organized and conducted by the International Franchise Association on behalf of the World Franchise Council, and analyzed by FRANdata, the answer is a resounding “yes!”

Based on the sample, two million franchised businesses sustain more than 19 million jobs around the world. What makes franchising attractive not just for individual entrepreneurs but also for economies is its economic output. On average, franchising contributes just over four percent to national GDPs. To put this into perspective, this is higher than the share of the U.S. defense spending to U.S. GDP, which in total dollars is more than the total of the next 10 countries combined.

Measured by foreign penetration, at an estimated five percent, the U.S. reports the lowest share of non-domestic franchise brands. This is not surprising given the country’s pioneering role in developing the franchise business model. It also sends a clear message to non-U.S. brands: there is room for you. Given that an adjusted average 26 percent of brands in each country are foreign based, the United States can support a much higher share of foreign concepts. On the other hand, U.S. franchisors will be pleased to know that the globe provides ample opportunity for concepts seeking international expansion. The penetration rate for non-domestic brands can be has high as 80 percent and more. For example, in Indonesia, 81 percent of franchise concepts have foreign franchisors, and in Croatia that number is 88 percent.

At 3,800 concepts, the United States leads the pack with the highest number of brands offering franchises. South Korea is a close second with 3,700, followed by Taiwan with 2,400 brands. According to Taiwan’s Association of Chain and Franchise Promotion, the country’s entrepreneurs have a special affinity to the franchise business model, which has been booming recently.

Each country hosts an adjusted average of 865 franchise brands. This excludes the two outliers, the United States (3,800) and South Korea (3,700).

Franchise concepts in the sample operate an average 44 businesses in each country, ranging from five in Lebanon to 87 in the Philippines. At an average 201, the U.S. was excluded as a statistical outlier in addition to Indonesia (146) and Japan (194).

In the sample, Asia also dominates the top five based on reported franchised business counts. As with the number of brands, the United States is in the No. 1 spot with 770,000 franchised businesses. Japan ranks second, followed by South Korea, the Philippines, and Taiwan. The strong presence of franchising in Asia is in line with the Association of Chain and Franchise Promotion, Taiwan’s assessment that Asia shows a high affinity with the franchise model.

Economic Impact and Employment

Not all countries were able to provide information on franchising’s impact on their national economies. The 20 countries that could provide information represent 53 percent of global GDP, with the combined economic output of their franchises making up 2.3 percent of global GDP. Twelve of these countries are OECD members.

With $844 billion, the United States reports the largest economic output generated by franchising, followed by France, Australia, and Germany.

When measured as a share of a country’s GDP, it becomes even more obvious why franchising presents a great opportunity for national economies. New Zealand emerges in the top five — with 11 percent of its GDP generated by franchises — while the United States drops to mid-field among surveyed countries. France, Australia, and Taiwan maintain their top five spots, with franchises in the three countries combined generating almost $500 billion, representing a large share of each country’s total economy.

The franchisors represented in the sample data employ an adjusted average 618,000 people per country, excluding the U.S., where franchises employ an astronomical 8.6 million people. Taiwan’s two million franchise employees include foreign-based employees of the franchisors operating in the country, particularly in China. Austria and Lebanon have the lowest franchise employment, reporting less than 100,000 people employed by franchises.

On average, franchisors and franchisees employ nine people per franchised business. This rate ranges from four people employed by each franchised business in Italy, to 18 in Lebanon.

There is little evidence that a country’s ranking on the relevant World Bank business indices correlates with franchising activities. Not surprisingly, Australia and New Zealand enjoy many benefits from franchising. The land of Frodo tops the three crucial indices where 1 is best and 189 is worst. New Zealand ranks 1 for both “ease of starting a business” and “getting credit” and 2 measured by “ease of doing business.” Australia ranks 7, 4 and 10, respectively.

However, the picture becomes less clear with regard to the other strong countries identified in the WFC survey as shown in the table below. France, South Korea, Taiwan and the United States appear in the survey’s top five rankings at least three times. While all four nations also have good rankings on the World Bank’s indices, they are not all stellar.

What this means for franchisors is that entrepreneurs do not seem to be intimidated by obstacles to accessing credit or how easy or hard it is to start a business. Case in point, the Philippines. The country appears in the top five based on number of brands and number of units although its business rankings are comparatively bad, a 95 for ease of doing business, a whopping 161 for ease of starting a business and 104 with regard to credit availability

We had the privilege to present these findings to the IFA International Committee last February during the association’s  Convention. Although responses from the study were primarily estimates, what resonated to the audience was the strength of a collective global view on franchising. There was an apparent excitement and energy around continuing the progress in understanding how effective international franchise efforts are, franchising’s impact on a country’s economy and most importantly, the need for shared information to help enhance global franchise efforts. We are confident that the IFA’s mission to leverage the World Franchise Council to gain a fuller picture of franchising worldwide and, with the support of FRANdata, the momentum from this milestone will continue to provide a platform of analysis that ensure the growth of the franchise model worldwide.

Edith Wiseman is president and Peter Schwarzer is research director at-large of FRANdata, a leading franchise best practices advisory firm and the strategic research partner of the IFA. Find them at fransocial.franchise.org

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