Times Are a Changin’
What a difference a few decades make to franchising
(Adapted from an article appearing in The International Who’s Who of Franchise Lawyers 2011.)
In his fanciful short story “Rip Van Winkle,” the 19th-century writer Washington Irving tells the story of a villager who strolls into the mountains, has too much to drink, and falls asleep under a shady tree. When he wakes, he learns to his astonishment that 20 years have passed. Similar folktales can be found in German, Chinese, Greek, Jewish and Irish literature. All serve as a convenient technique to reflect that the times they are a changin’.
In international franchising, they sure are.
If you were to awaken in 2010 and learn that you’ve slept for decades, you would find a quite different landscape for international franchising than when you dozed off. No facet of cross-border franchising has remained static; some have changed so dramatically as to be virtually unrecognizable. Consider only a few:
Who is franchising?
If you fell asleep in 1960 you would be doing so in an environment in which virtually no franchisors were seriously engaged in cross-border franchising. For most, expanding beyond their own shores was unthinkable. When you awake in 2010, of the top 200 franchisors’ units, 32 percent are overseas; only about 30 on the list have no units abroad; and even those at the bottom, by no means “large” companies, are well represented abroad.
The nature as well as size of franchisors doing cross-border franchising has also changed significantly. Some large franchisors (which sometimes boast that they do not franchise, “to control quality better” ), in fact do franchise in other markets (sometimes quietly, and sometimes without using the term). Early in the history of international franchising, most franchisors were U.S.-based. In 2010, however, the overwhelming numbers of franchisors are indigenous.
Who is the franchisee?
When you fell asleep, it would have been difficult to generalize with respect to the typical foreign franchisee. In some respects, he did not differ significantly from a domestic franchisee.
While the typical foreign franchisee was almost certainly better funded than many domestic franchisees, the gap was not necessarily huge. Today’s foreign franchisee is markedly different. Virtually all cross-border deals are for multiple development. Virtually all foreign franchisees are in a different league financially than most domestic prospects. That phenomenon has been accelerated by the credit crisis, which has disproportionately affected franchisees in the U.S., who predominantly rely on commercial banks for credit. Contrast that to foreign franchisees, who are more likely to rely on family sources, syndications, and the like.
Beyond pure size, there are some other interesting distinctions:
Not infrequently, the franchisee may be closer in bargaining power to the franchisor than at home. In some cases, especially in post-socialist societies, the franchisee may have an affiliation (sometimes close indeed) with the government itself.
If just prior to your nap, you had been asked about an application from a franchisee already engaged in operating the brands of other franchisors, your reaction would likely have been very negative. Today, the typical franchisor has largely cast aside those concerns, viewing them as outweighed by the candidate’s experience with the process of franchising itself.
Where is the franchising happening?
Just before you drifted off, virtually all cross-border franchising, at least from the U.S. perspective, consisted of ventures into Canada, some activity in English-speaking countries; and a few pioneering ventures into Japan.
Contrast the world today, which is wide open to franchising. In just one example, faced with falling U.S. sales, Yum! Brands is mounting an aggressive drive into China, aiming to make the country its biggest profit source within a decade. Yum! is now China’s biggest restaurant chain, with 2 billion in annual sales and over 2,500 KFCs and Pizza Huts. China delivered about a third of Yum!’s operating profit in 2009.
What techniques are being used?
Just before you drifted into the arms of Morpheus, the answer was probably If the check clears, we can make anything work. There is no doubt that this has greatly evolved.
Even then, single-unit transactions were rare. That remains, by and large, the case. The exceptions may be where the franchisor is sufficiently large that it has a branch or subsidiary present in the country and can comfortably supervise such a network. At the other end of the spectrum, multi-country franchise grants have begun to emerge. But for most franchisors, single country, multi-unit franchising remains the paradigm, either as area development or master franchise arrangements.
Beginning about 20 years ago, joint ventures began to be explored. What most franchisors have concluded is that while they may make sense under the right circumstances, they are unwilling to dilute the financial and managerial benefits of franchising. In addition, in many countries, franchisors will find that creating a “joint venture” still does not avoid franchise laws.
Where and how is franchising being regulated?
Not until the very end of the decade of the 1960s were there any governmental stirrings, and then only in the U.S. Most of today’s regulation by states can be traced to laws enacted in the 1970s. Except for a single Canadian province, no jurisdiction followed the U.S. lead. But in the 1990s, many countries followed. And, perhaps most startlingly, the least regulated part of the world, Asia, reversed course. In the past decade, many more jurisdictions have joined in.
What kind of support is available to international franchisors and counsel?
The first globe-trotting franchisors left home with a passport (probably newly minted), a phrase book and Pepto-Bismol. Things have changed.
There were then virtually no associations of franchisors or franchisees other than the International Franchise Association itself. Today there is an association in virtually every market in the world. There are, of course, legions of consultants, ranging from quite good to almost impossibly bad. International banks, accounting firms, and other such institutions may be worth exploring. Governments have significantly expanded their capabilities in this field. Infrastructure which some older industries take for granted is less prevalent in franchising; for example, there remain very few graduate school courses or institutes focusing on this field. A few databases, although some are notoriously suspect, can be useful.
The realm of finance has shown a dispiriting lack of progress. Traditional domestic sources of funds remain skittish, and enlightened franchisors are beginning to spend more time with financial institutions in target countries.
Who is practicing franchise law?
Any observer of the contemporary scene is likely to respond: A helluva lot of lawyers.
Well, there are certainly more than there were in 1960. Those who initiated the practice of “franchise law” - not to speak of “international franchise law” - soon found that there was no recognized body of law which fell into the neat pigeonholes to which lawyers are accustomed. Early franchise lawyers were almost all immigrants from other, better recognized disciplines. Only a sliver of law firms thought franchising a worthy area of practice. Today, franchising law to one degree or another, can be found in many types of law firms. But, while the choices are surely greater, the necessity of examining credentials and real-world expertise is as strong as ever.
So, has everything changed? Not entirely. The fundamentals remain familiar to the international franchisor of decades past: You’d better have a good product or service. It had better be readily adaptable to other cultures. And you need a solid support network at home. What will the changes be during the next decade or so? Only a charlatan would pretend to know what will happen in the coming years. But I don’t recommend napping through them.
Philip K. Zeidman is a senior partner in the Washington, D.C. office of DLA Piper U.S. He is general counsel to the IFA and can be reached at Philip.Zeidman@dlapiper.com