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In Prague, why not to stay at home


Published:

Philip Zeidman

Dateline:  Prague

Prague was at its best. The river was sparkling; the music was stirring, spritely or stately as you chose; the art and architecture appealing; the food extraordinarily good. There was not even a hint of the grim life under socialism, which many of us remember from our earliest visits there.

Beyond the charms of Prague and some other cities in the Czech Republic, how attractive is the country from a commercial perspective? It has been going through a protracted recession (a slightly shrinking gross domestic product, coupled with some inflation), perhaps the longest since the fall of communism. The consequence of stagnation and real wages is, of course, reduced consumption.

But we are not talking about a country to be crossed off of one’s list of potential places to do business. It has one of the most stable economies in the region, due in part to its central location and low cost structure. The economy is led by exports to the European Union, principally to Germany but elsewhere as well. It is home to some of the fastest growing technology companies, and is now a net exporter of technology and digitally related products. That bright spot has led to an upturn, the first since 2011.

We are accustomed to seeing the landscape for franchising mirroring that of the economy at large. In the case of the Czech Republic, however, the franchising sector has outpaced the economy’s other performance. To a large extent that reflects the entry of U.S. and other foreign franchisors, attributable to some degree to a legal framework relatively friendly to incoming franchisors: foreign franchisors treated the same as domestic; no limitation on payments made in foreign currency; no unusual prerequisites for engaging in franchising; no explicit franchise statute.

That’s perhaps an element in the current high level of franchise activity.  The number of franchise brands rose by 10 percent in 2013, and another 12 percent in 2014. Meanwhile, the number of franchisees grew in 2014 by 6 percent, and the number of units by 3 percent. At least 150 franchise brands are active here, and some estimates put that number in excess of 200, although it seems likely some of these are relatively dormant.

Prague

Prague was at its best on a recent visit.

While they include most of the U.S. brands with which we are familiar, the U.S. presence is certainly not overwhelming. According to the U.S. Embassy in Prague, however, there is a long list of franchisors expressing an interest in coming to the country. Moreover, observers believe there is considerable untapped potential, especially for services of almost every kind. That is especially true in Prague itself, and especially for franchisors whose programs include a strong element of training.

Who are the franchisors already there? The best estimate is that 42 percent of them are foreign. That obviously leaves a lot of indigenous franchisors.  Jana Ruckerova, commercial specialist in charge of franchising for the U.S. Commercial Service, lists some—which she emphasizes are illustrative only: Ambiente (cafes and restaurants); Bageteria Boulevard (French-style fast food restaurants); Fruitisimo (bars); Nas Grunt (meats and cheeses from local sources); Natur House (dietary centers); Oxalis (tea and coffee); iDry (car washes).

If there is one area in which the country’s franchising industry is not reaching its potential, it is similar to many other European countries: They simply do not readily venture beyond their own borders.

Of the list just noted, except for Natur House and some small footprints in Slovakia, none of these companies appears to have expanded beyond the Czech borders. And, while I did have the unusual experience of assisting a Czech franchisor bring his tea house concept to the United States, that pattern appears to be characteristic of Czech-based franchisors generally.

Why? Some of the reasons are obvious, of course: It’s a small country. But that cannot be the entire explanation.

Contrast it, for example, to a state in the United States. The population is strikingly similar to Georgia’s (our Georgia, not the other one).  Georgia’s gross domestic product per capita is only 30 percent greater; its unemployment rate is only 30 percent lower; and, in fact, the Czech Republic’s exports are about four times those of Georgia.

Notably, the number of franchise brands based in Georgia is no more than half the number in the Czech Republic. But in terms of exporting those brands beyond its boundaries, these two spots on earth exist in different universes. While there are no reliable statistics, even a glance at the list of Georgia-based franchisors reveals what one would expect. A very large portion, certainly the majority, sell their franchises beyond Georgia. Given the relatively small size of the state itself, it seems likely that for many of these companies the majority of their franchises are being sold to franchisees in other states.

As we’ve seen, the difference is not that Georgia’s economy is a powerhouse (it’s well below the mid-point of U.S. states) nor is the difference that Georgia’s neighboring states are overwhelmingly attractive markets (Alabama?  Tennessee? South Carolina? North Florida?)

No, the difference is culture, and mindset: if not a lack of confidence in their concept, a lack of boldness in exploring their appeal elsewhere.

That is not a pattern of behavior that can be reversed by legislation. But, given the demonstrable benefits to an economy from exporting its franchise concepts—if I were an ambitious civil servant in the Czech Republic I would be hammering away at this opportunity. And if I were a graduate student in economics or public policy at the old and respected Charles University, I would surely have found the topic for my thesis.

Philip F. Zeidman is a senior partner in the Washington, D.C., office of DLA Piper. He can be reached at Philip.Zeidman@dlapiper.com

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