Weak dollar spurs strong international development
The weakened U.S. dollar is making franchising stronger—at least overseas.
The greenback's plummeting value compared with foreign currencies like the Euro is making expanding internationally easier for even smaller franchisors by effectively lowering the franchise fee while increasing royalty payments. And the economics are intensifying the overseas development of numerous franchises that years ago may not have even considered foreign soil.
"We've seen a certain trend in terms of interest," said Carlos Poza, vice president of international affairs for the International Franchise Association. More people signed up to attend seminars on international subjects at the IFA convention this year, and more franchise executives are listening to their international experts, resulting in overseas expansion factoring more prominently in their expansion plans, he said.
Florida-based Salad Creations opened its first unit in Brazil in December, but by June will have five open. While that may not seem like much, consider that Salad Creations only has roughly 40 franchises overall right now. "They're eating it up, no pun intended," said Erik Premont, director of international development for the quick-service salad franchise.
Not to be outdone, the 40-unit children's recreation chain JW Tumbles has 40 units, five of which are overseas. Two others are about to open. "We've had a big upsurge in international lead flow," said the company's chief executive, Ash Robinson. "We've always received a lot of international leads, but the quality of leads is going up. The dollar creates a favorable market."
While this might seem to go against the franchising grain—Shouldn't a franchise first concentrate on establishing its brand in the U.S. before testing it out overseas? —companies have good reasons for boosting their international development efforts.
The possibility of a looming recession has many franchisors hedging their bets by looking at markets where the economy will likely remain stronger. While the troubles in the U.S. could hurt the world economy by making people here less likely to buy goods, many markets have been able to shift their attention to countries like China or oil-rich nations in the Middle East.
"People are trying to weatherproof their operations because they see the possibility of a recession in the U.S.," Poza said.
And many of these markets are ripe for development. While brands like McDonald's and KFC may have a firm presence in places like Europe and China, those markets remain less competitive than the U.S.—where the franchise market, especially for restaurants, is arguably saturated.
Put more simply: Growth in many international markets is easier and more
"For companies that are more established right now, go," Premont said. "Go, go, go, go. Go south, go east, go west, go north. Go wherever you want. The value of the U.S. dollar is making it extremely interesting for foreign development."
Not every company reports expanding overseas is easier these days. Arizona-based AlphaGraphics, which has 40 international locations, says it's not having an easier time building in other countries. "We're not seeing it," said Art Coley, director of franchise development for the company. He said uncertainty in many foreign markets offsets any benefit they may get from a falling dollar. Buying existing companies, meanwhile, is more challenging because the value of the dollar makes such acquisitions more expensive.
Still, the chain has 265 locations and plans to double that in five years. "There's no question we can't do that without an international piece," Coley said.
Nevertheless, most companies say they are facing a favorable international development market. And even some of the challenges to that development is turning into a benefit, at least to the foreign franchisee. Premont noted it took several months between the time his company's master franchise agreement was signed in Brazil and the time the government there OK'd the payment of the franchise fee to the U.S. The dollar fell so much over that time that the franchisee saved 40 percent off of its fee.
Dan Rowe, president of the franchise development firm Fransmart, said his company is inking numerous deals internationally. Many of them are in the Middle East—such as a deal with a company called Bohoor International, which will open 34 zpizza franchises. The Middle East is a notable hotspot for numerous franchised companies.
Fransmart also inked several international deals for the European-style, fast-casual concept Vapiano in Eastern Europe and Asia. "We're selling a lot of international deals right now," Rowe said. "Part of that is the dollar. Part of that is the ripening of the markets."
Rowe said franchisors are taking international deals more seriously than they
had in the past. Years ago, he said, smaller franchisors would ink development
deals in foreign countries then walk away without providing much, if any, support. Frequently, he said, many units didn't open—the franchisor simply collected money and left.
Now, companies are providing the same infrastructure overseas that they do in the U.S. In addition, he said, supply lines are much better in foreign markets than they once were. "There's a fantastic supply line chains can tap into for food, paper, furniture," he said. "You didn't have that 10 years ago."
To be sure, expanding overseas isn't cheap for the franchisor, and the decline of the dollar makes those costs more expensive. In addition, other countries can frequently have complex requirements—in China, for instance, Rowe said a franchisor must first build a unit in that country to prove the concept works before selling franchises.
Legal costs are frequently a high price for doing business overseas. Companies have to register their trademarks and follow different sets of rules. Franchisors say legal expenses are among their biggest costs of doing business overseas.
Development can also be a problem in some areas. In London, where a pound is twice the value of the dollar, a company wishing to expand in certain locations may run up against local restaurant moratoriums, Rowe said. A company must buy out an existing restaurant to move in—similar to New York, but thanks to the poor value of the dollar much more expensive. "You have to pay even a failing guy to go away," he says. "Because he knows he can sell his restaurant for $400,000 to $500,000. But for good spaces, it's worth it."
There are also cultural differences. Restaurants that expand in the Middle East have to deal with Ramadan, the month-long Muslim religious observance that requires fasting until sundown. Premont said the key in succeeding overseas is to maintain the balance between protecting the brand and adapting to local cultures.
Restaurants aren't the only ones that have to deal with those issues. In Saudi Arabia, for instance, boys and girls must play separately—an issue companies like JW Tumbles must deal with when they build there. That company's buildings, programs and marketing plans must take that separation into account, which drives up the initial cost of doing business there. "We've learned that localization is the most important thing," Robinson said. "Apart from the legal
costs of investing in another country, localization is the most expensive."
Rowe also noted that many of the companies buying franchises, particularly in the Middle East, are large, billion-dollar firms. One of the companies that signed on to open zpizza is a large mall developer. "We're not selling mom-and-pops," he said. "All the international deals we're doing are large, countrywide groups."
Those companies may take longer to work out a deal, but their strength is worth it, Rowe said. He added that companies are looking for strong brands to fill out developments or to simply bring more options into their countries.
There is another aspect that makes it easier for companies to expand overseas: technology. It is easier for Salad Creations, for instance, to manage not only its U.S. units but those it is building in the Middle East, Ireland, Puerto Rico, Mexico and Great Britain.
"Obviously, technology has made this offer available to everybody," Premont said. "And franchisees see the need for a concept like that in their country. And they have trust in the American way of establishing a business."
A story about the Contours Express fitness chain in the March edition of
Franchise Times incorrectly stated that attorney Michael Garner had signed some franchisees. To date he has signed only one Contours owner and has not filed any legal action.