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Internationalization of franchising not just a matter of opinion


Published:

Philip Zeidman

Illustration by Jonathan Hankin

The International Franchise Expo at the Javits Center in New York became once again the center of the franchising universe for three days at the beginning of June. All those who revolve in the orbit of franchising were there.

To this observer/participant, one feature was the most newsworthy. For years the question of the internationalization of franchising has elicited debate: Is cross-border activity really becoming the future of franchising? Or is it still mostly hype, just enough to burnish an executive’s image at the country club, but not much more?

Is the growth in the number of smaller franchisors taking the plunge simply the precursor to undercapitalized collapses and embarrassing failures of execution? For years that’s been an issue on which reasonable people could differ.

This year felt somehow changed.  Part of that change was the sheer number of franchisors and prospective franchisees who came from other countries. Part of it was the ubiquitous U.S. Commercial Service representation. Part was the presence of franchise associations from other countries. Certainly, part was the number of educational programs catering to this obviously ramped-up interest.

Anywhere in the world

Perhaps the single most striking piece of evidence of the seismic shift was simply where the exhibiting franchisors were seeking to sell their franchises. It’s not surprising that some 90 were targeting Canada. But consider these geographic areas of interest: Africa, more than 50 franchisors seeking franchisees; Asia, Australia, New Zealand; Central America; Eastern Europe; Middle East; South America—each more than 70; Western Europe, more than 80. And, the most astonishing figure of all: More than 100 franchisors were seeking franchisees anywhere in the world.

And what did we learn from this cornucopia of people, programs and materials? Here are a few of the more memorable themes.

With all the talk about the growth of indigenous franchising—franchisors based in other countries—has that materially changed the historic dominance of U.S.-based franchisors?

Really, not much at all. Of the top 100 global franchises, 81 call the United States their country of origin. No other country has more than five. And of the 19 based outside the U.S., several sound awfully familiar to an American ear: H&R Block in Canada and Intercontinental (read Holiday Inn) in England, for example.

But why shouldn’t the potential beyond the borders of the U.S. be tantalizing? After all, that’s where 96 percent of the world’s consumers are to be found, along with more than three quarters of the world’s purchasing power.

The largest U.S. franchisors have taken those stark numbers to heart. Among the 200 largest U.S.-based franchisors, almost 40 percent of their units are already outside this country. That’s up from 30 percent only a decade ago, a truly steep trajectory.

The shift abroad has been accelerating even more rapidly than that statistic would indicate. In the last year for which the information is available, those 200 franchisors added only 926 new units in the United States, their home market. Contrast that with their overseas activity, where they added 11,124 new units. In other words, for every U.S. unit opened they established 12 units in other countries, a growth factor 19 times that in the United States.

Not all of those companies were of the stereotype that leaps to mind: the giant foodservice operation.

Those with high percentages of international activity are by no means all giants (Roundtable Pizza 23 percent; Travelodge 24 percent; Cold Stone Creamery 26 percent; Minute Man Press 27 percent; Mr. Rooter 30 percent; A&W 34 percent; Howard Johnson 38 percent; Cinnabon 42 percent; Johnny Rockets 46 percent).

And they’re not all foodservice. The true pioneers were the hotel chains, and today the top 10 are each in at least 75 countries, and in the case of Marriott, 122. Nor are the largest franchisors all restaurants or hotels. No. 6 is Ace Hardware, No. 8 RE/MAX (with 51 percent of its units outside the U.S.).

So much, then, for those timeworn stereotypes.

Why this explosive growth? And, especially, why now? Lots of explanations were offered, most of them the usual suspects:  Less emphasis than in the past on waiting until the domestic market is saturated. Greater receptivity to Western goods and services. Growing middle classes and youth markets—both sweet spots for many franchisors. Less competition abroad.  

And there was one intriguing suggestion: The great growth of the last 10 years just happens to coincide with the period since the last recession when franchisors found U.S. prospects unable to get credit easily, while foreign prospects were both larger and less reliant on traditional sources of funding. And so, goes the argument, U.S. franchisors found the foreign market more welcoming. Today, even in the face of a rebounding U.S. economy, they find they liked what they saw abroad and they remember it well.

Keep it going

There is broad consensus that this movement will continue. Members of the International Franchise Association, when posed a series of questions about their reliance upon international growth, and their plans to begin or accelerate it, responded overwhelmingly in the affirmative.

No one should conclude from this distillation that the future is entirely rosy, or that the normal cycles of business have been repealed. That is clearly not the case, and future columns will explore this more nuanced issue, as well as some best practices to use to “do it right,” and to “keep it going.”

For the moment, though, it’s fair to conclude from the 2018 IFE that international franchising has never been stronger, or more promising.

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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