What to do when turmoil strikes your country of choice
After operating in Libya with master franchisee Hamid Barkah since 2014, Chem-Dry exercised the force majeure clause in its contract later in 2015, opting to suspend activity there because of political conflicts within the country and what Chem-Dry CEO Dan Tarantin called a “perception issue” given the American look of Chem-Dry’s service van.
Though he didn’t elaborate on that incident, the decision was reached through conversations with the franchisee, who Tarantin said was “being prudent” as he felt his carpet and tile cleaning business was being impacted by the continued political and civil unrest in the North African country.
While Tarantin called this “an extreme example” of what can happen when operating in countries with high levels of instability, it’s an outcome that can’t be ignored.
Alexander Tuneski, who counsels franchisors domestically and internationally for law firm DLA Piper, said franchisors must have agreements in place that protect them from everything such as currency volatility to “unrest that prevents you from conducting business.”
“Consider what the effect of political unrest is,” said Tuneski. “Is it economical? Is it causing civil war or strife and people can’t go out because it’s unsafe and they’re not able to spend money? Is it slowing down growth? Or if it’s affecting the government, you have to take into account bribery, corruption, if there are people on terrorist watch lists.”
Yucel Adiguzel is Chem-Dry’s master franchisee in Turkey, where he aims to grow the brand’s footprint despite economic and political uncertainty.
But if the economy is still doing well and issues are confined to a certain city or region, franchisors may not want to discount a particular country entirely. “We do have clients going into Iraq and other countries you’d think wouldn’t be prime opportunities right now but they’re exploring,” noted Tuneski.
The experience in Libya hasn’t deterred Chem-Dry from expanding to other troubled regions, most recently Turkey, where the Nashville, Tennessee-based company signed a master franchise agreement in 2016. Chem-Dry has franchisees in 52 countries.
“A lot of the places around the world with some political things going on, they still have a growing middle class,” said Tarantin as he noted Turkey has the 18th largest economy in the world. “It’s not an underdeveloped country and we didn’t let the political dynamics get in the way.”
Those dynamics include an attempted coup against state institutions in July 2016 and the consequent replacement of public officials. The Turkish lira took a hit, Tarantin acknowledged, but otherwise business hasn’t been impacted and the master franchisee there, Yucel Adıguzel, is up and running and will bring other ‘zees on to grow the brand’s presence.
Chem-Dry’s flexible business model lends itself to operating in difficult countries, Tarantin explained, as master partners can run the franchise themselves and/or sub-franchise. The initial investment is also low, starting around $50,000, and Chem-Dry makes all its products in the U.S. and ships abroad.
The products “have a long shelf life so the franchisees don’t have to worry about a supply chain issue like they would with food,” said Tarantin.
William Edwards, however, threw a bit of cold water on the prospect of franchising in Turkey. The CEO of Edwards Global Services, which assists U.S. franchisors in their international development, said foreign direct investment in Turkey is down 85 percent from a year ago, and EGS has three licensure agreements on hold in the country.
“It’s not a consumer problem, it’s the government going from a democracy to something less than a democracy,” said Edwards, who also noted Turkey’s open borders to Syria and Iraq as concerns, along with incidents of bombings at malls and other shopping areas.
The level of instability of a country “of course is a concern” when expanding internationally, said Mark Parmerlee, CEO of quick-service restaurant concept Golden Chick, which in 2015 signed a master franchise agreement with Pakistan-based Crescent Star Foods.
One of two Golden Chick restaurants in Pakistan; a third is set to open this summer.
“There’s been a couple of bombings in Lahore,” said Parmerlee, naming the second largest city in Pakistan and where Golden Chick has one restaurant open and another scheduled to open this summer. “For us, it comes back to having a good local partner, one who is connected, who is capable and for whom it’s considerably safer to operate there.”
The political environment back home also bears consideration as President Donald Trump and his administration continue to face international criticism over issues ranging from the recently reworked executive order keeping citizens from six predominantly Muslim countries from entering the United States to the president’s stance on major trade agreements, having already signed an executive order to pull the U.S. from the Trans-Pacific Partnership that included countries such as Japan, Australia and Chile.
“In a lot of foreign countries, you bring up President Trump and you might get a bad reaction,” Parmerlee said. “In Pakistan, we don’t see angry mobs and ‘death to America,’ to the point where it’s impacting our business. But we are aware of it, that that sentiment is out there.”
Edwards said the day following Donald Trump’s election as president brought calls from a number of EGS clients concerned about being able to sell U.S. brands internationally. While the politics aren’t to be ignored, Edwards said, “I don’t think it’s going to be a long-term problem,” and in the Middle East there’s really been no pushback specific to American brands.
Following the election, however, EGS did add four new categories to its GlobalVue international development analysis: political meltdowns, economic disasters, wars and unrest, and investment risk level. The new focus Edwards said, provides a better view of a country’s investment climate.
And what about the six countries—Syria, Iran, Sudan, Libya, Yemen, Somalia (the revised order removed Iraq)—listed on the travel ban? “Those are countries I wouldn’t want to send my staff into. They might not come out. I’m not being political, that’s just the reality,” said Edwards.
In cases where safety is the issue, most franchisors in the U.S. have some sort of disaster plan, said Michael Daigle, a partner at Cheng Cohen law firm in Chicago. And if they don’t, they should. “Build into agreements that it’s our job to protect our employees and if we deem the region or situation is too unsafe, we won’t send our people,” said Daigle, talking about the franchisor’s agreement structure. “Both sides have to recognize the risk and structure the deal accordingly.”
What really concerns Daigle since President Trump’s election, however, is the level of overreaction.
“The administration is overreacting, the media is overreacting, the public is overreacting, and I think it will all settle down,” said Daigle. “But whether that affinity for U.S. brands is going to be tarnished, and what ultimately is going to be the outcome of this isolationist policy that the administration is appearing to adopt remains to be seen.”
Tarantin agreed and said Chem-Dry will continue to put the quality of candidates at the top of its list when expanding internationally, with socioeconomic issues and the political situation coming second.
“Our view is, there are certainly a lot of open questions about what will happen politically here and we’re not going to rush to judgment,” said Tarantin. “U.S. brands are still very strong. We’re not feeling there is a specific risk.”