Before making the international leap, first try drinking from a firehose
Illustration by Jonathan Hankin
Washington, May 7-8. The 35th annual International Franchising Seminar, jointly sponsored by the International Franchise Association and International Bar Association. An event attended by lawyers and others from 22 countries—remarkable, since the program only spans a few hours.
New York, May 30. The International Franchise Expo, an event attended by thousands of visitors from all over the world. Specifically, the program on Global Franchise Expansion.
If you’re interested in what’s happening in international franchising, it would be hard to identify two more productive ways to spend some time than at these two events, separated by a couple of hundred miles and barely three weeks apart.
There’s a drawback, though, to this rich and awarding experience: It sometimes seems that there may be too much information to absorb. As one of the visitors commented, “It’s like drinking from a firehose.”
So what can we do to extract for you some of the more interesting facts, figures and observations to which the attendees were exposed?
Here are some of the important things they learned.
International expansion by U.S. franchisors is:
- Ubiquitous: Of the top 200 U.S. franchisors, 40 percent of their units are already overseas.
- Growing: Overseas units grew by 4.5 percent last year.
- Outstripping domestic growth (and by a mile): Last year, the top 200 franchisors had a net loss of 165 domestic units … and an increase overseas of 8,800 units, more than 6,000 of those from the top 10 franchisors alone.
- Important to them: In the case of 16 percent of the franchisors, international sales generated more than 25 percent of their revenues.
Not all the assumptions turn out to be correct.
- It’s not only the giants. Some of the fastest international growth is among smaller franchisors.
- It’s not all foodservice: 11 of the top 20 are hotels, about half of them with more than 50 percent of their units abroad (and the top 10 chains averaging locations in about 100 countries).
- And it’s also both retail and service.
It is still U.S.-centric
Of the largest 100 franchisors worldwide, 84 percent are still based in the United States. And of the top 10 fast food franchisors, in every case there are more units in the United States than anywhere else.
But increasingly, U.S. franchisors are finding their principal competition in other countries is not necessarily other U.S. companies, but indigenous franchisors.
And there are some interesting examples: Jollibee, a multinational chain of fast food restaurants headquartered in the Philippines, as of December of last year had more than 4,500 stores worldwide with sales approaching $3 billion.
Some of the country rankings on issues of importance to international franchisors may be surprising.
- Market size is not a surprise (China, India, Indonesia).
- But the country with the fewest legal concerns for international franchisors may be: Ireland.
- The ease of an international brand entering the country: again Ireland; but also the Philippines and Spain
- The ease of starting a new business: many are predictable (Australia, Canada, the U.K.) but also South Korea and Russia.
- The least corrupt: again, most are predictable. But how about Poland?
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To be sure, not everything could be reduced to categories and numbers. Consider that surely nobody would have predicted a few years ago that Vietnam would be viewed as “hot,” but there has been a veritable explosion of franchising, including some by indigenous companies. And perhaps the most intriguing idea being talked about in the corridors is bringing ideas developed abroad home for use in America.
Finally, is the surge in international franchising likely to continue?
Certainly the members of the International Franchise Association think so.
When asked in a survey, “Does your company currently either franchise or operate locations in international markets?” “Does your company plan to accelerate or start new franchise operations in international markets?”; and “How important is international to your company’s future success?”, they responded affirmatively, between 80 percent and 90 percent to each question.
But no one following developments in this field can be unaware of the history of nasty surprises which appear without much warning: bubbles bursting, like those which brought sky high license fees crashing to earth in Japan; recurring evidence that some franchisors view their overseas markets as something they can take for granted; and the way the trend toward demonizing franchising for all manner of social evils has made the journey from the United States to foreign markets.
A firehose, yes. But if you can take it all in, priceless.
Philip Zeidman is a partner in DLA Piper’s Washington, D.C., office. Reach him at 202.799.4272 or email@example.com.