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When osmosis comes to franchising, it brings plenty of benefits


Philip F. Zeidman

Illustration by Jonathan Hankin

You remember it from high school science class, don’t you? Osmosis: “the passage of a substance through a thin membrane.” Over time it has come to be used, loosely and inexactly, in other contexts—say, to describe how a child adopts the speech patterns, habits or mannerisms of parents. But it can also refer to what might be called cross-cultural osmosis: how an activity or influence crosses borders from its country of origin to a receptive audience or market in another country.

Now, something like that is happening in international franchising. We have long accepted—and embraced—the phenomenon of U.S. franchises moving into another country (make that every other country). And, along with that company-by-company movement comes the adoption in other countries of forms of franchising pioneered and thriving in the United States.

An illustration: about 70 percent of all hotels in the United States are franchised. Until fairly recently in Europe, the penetration was only a fraction of that. Today it has climbed to 40 percent, with several brands above 50 percent.

But we are now seeing the reverse: the effect on U.S. franchising of ideas, businesses and other influences from abroad. Here, the “membrane” is the invisible barrier surrounding the U.S. and its millions of consumers. Nothing so physical and symbolic as, say, the notion of a “big, beautiful wall on the southern border.” Rather, it is the barrier to entry represented by laws, regulations, differing tastes, language and habits, and the intimidating costs entailed.

Breaking the barriers

We have now accumulated enough experience to be able to say that barrier can be surmounted, that “membrane” pierced. The most obvious manifestation, of course, is the arrival of foreign franchises themselves.

Some have been here for several years (Body Shop, Yoshinoya, Le Pain Quotidien, Cartridge World, Pollo Campero, Tim Hortons, Kumon, WSI). Others are more recent (Metal Supermarket, Gyu-Kaku).

Many of them have elected, probably wisely, to make their entry in the first instance through company-owned units. The record is not one of unalloyed success. Trademark issues, undercapitalization, difficulties in adapting to different conditions, poor choice of partners—the reasons will surprise no one with experience in international franchising. But for several determined and thoroughly prepared franchisors, the much-discussed legal and regulatory barriers have proven to be overhyped. And the critical mass grows steadily.

Sometimes the influence from abroad can be less obvious than the wholesale arrival of a foreign franchise concept. U.S. franchisors are increasingly examining the products and services they offer abroad in search of qualities which would appeal to the domestic market.

KFC is perhaps the classic exemplar of multiple product offerings geared to local tastes. Some of them find their way back home. The original Zinger Chicken Sandwich, which originated in Trinidad and Tobago in 1984, finally came to the U.S. in 2017. And there are others.

The border crossings are not limited to the products themselves. The innovation and the use of technology is also evident in markets other than in the U.S., and one can be sure that some of those experiments, if successful, will wash up on our shores. Some involve artificial intelligence, of course.

Other examples include robots and touchscreen kiosks with a camera scanning the customer’s face to process cashless payment in less than one second.

Acquiring know-how

The “reverse flow” of techniques can be accelerated by acquisitions. Earlier this year, McDonald’s acquired an Israeli company that has developed decision-logic technology capable of varying outdoor digital drive-thru menu displays “to show food based on time of day, weather, current restaurant traffic and trending menu items.” Further, it can also instantly suggest and display additional items to a customer, based on their current selections. (Coming soon to a Golden Arches near you.)

It seems inevitable that the increasing significance of cross-border franchising (the top 200 U.S. franchisors already have 40 percent of their units overseas, with non-U.S. development representing the overwhelming percentage of their new openings) will ultimately be reflected in the human resources decisions franchisors make.  

The current immigration debate has attracted attention to the extraordinary share of American businesses founded by immigrants or the children of immigrants (41 percent of Forbes 500 companies; more than half of start-up companies valued at $1 billion or more; 52 percent of new Silicon Valley companies started in a recent decade).

Osmosis as enrichment

But those striking statistics are not limited to the foundation of companies. They extend as well to key members of management or product development teams: 70 percent of those $1 billion start-up companies. Across the entire Forbes 500, 12 percent of chief executive officers were born abroad, including some of the most iconic American brands.  

And the U.S. is not even the best example. In the U.K. the percentage of Financial Times Stock Exchange companies with a chief executive who is not a U.K. national doubled to 40 percent in the last decade.

Franchising will surely be no exception. Franchisors will be led by executives who were born, or educated, or spent significant portions of their careers in other parts of the world. And the companies—and we customers—will all be for the richer for this fascinating form of “osmosis.”

Philip Zeidman is a partner in DLA Piper’s Washington, D.C., office. Reach him at 202.799.4272 or philip.zeidman@dlapiper.com.

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