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Where do we go from here, when it’s no longer enough to ride the wave


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Philip Zeidman

Illustration by Jonathan Hankin

In my last two columns I wrote about the current status of international franchising. Both were grounded in past and present data. Now we enter a different realm —speculating on the future of international franchising.

The continued growth of cross-border franchising seems inexorable. In 2017, just under three-quarters of the largest 200 U.S.-based franchisors had units outside of the United States, and some of the most notable increases in international units are occurring in franchised chains whose domestic footprint is static, or shrinking.

Case in point: In 2016, for the first time in its history, Subway’s store count went down, closing 350 in the United States. In 2017, the net loss exceeded 900, and this year it will close another 500 in the U.S. Against that backdrop, consider its international expansion: It plans to open 1,000 units outside the U.S.

Beyond the numbers

But the sheer numbers don’t tell the whole story. Beneath those numbers there is much to learn about the changing nature of cross-border franchising. Consider the following topics:

The days when only giant franchisors were expanding internationally are long gone. A number of second- and even third- tier chains are going abroad. But with that change comes indisputable risk; some of these companies are inadequately capitalized, and lacking in the depth of experience desirable for such a move.

It is likely that the almost inevitable failure of some of these ventures will be thoroughly publicized. The consequent change in the “atmosphere” may well have an effect even on large franchisors.

The shift in attitude toward U.S. franchises and their international expansion caused by failure is likely to manifest itself in some less predictable ways. Government regulation, always lurking, may well be emboldened by such episodes, with tightened restrictions on incoming franchisors. The horror stories will strengthen the hand of indigenous franchisors, always prepared to urge their own citizens to cast their lot locally.

This growth of “native” franchisors is taking place far more broadly than it was only a few years ago. As recently as a decade back a U.S. franchisor considering expansion in Country X would devote the bulk of its “competitive intelligence” due diligence to studying what its U.S. competitors were doing, planning to do, or might seem likely to do.  

Today that is no longer adequate, for in virtually every country there are competitors with at least some degree of robustness. While there are few countries where these exist in large numbers, it doesn’t take a critical mass to pose a problem for the U.S. entrant:  The seductive appeal of the Western product or service may not be enough to overcome the natural advantages of familiarity and frequently lower prices.

We may see fewer companies seeking franchisees “everywhere,” or responding in a purely opportunistic fashion, with a more cautious approach in terms both of the quality of the foreign partner and the geographic span of the network. Those changes can, however, be for the ultimate betterment of the industry.

There is a tendency to react to ephemeral trends—the “what’s hot” factor in expansion planning. There is an undeniable appeal to getting in on the ground floor, to being ahead of the curve. But experience dictates that some of these movements can be transient, and an unreliable basis for committing the investment of time and resources needed.

Foresighted franchisors will look less for today’s headlines and more for reliable gauges—especially economic growth rate—and will want to see a sustained trajectory rather than a blip on the screen.

Brexit can no longer be dismissed as a peculiar and unique event. The impulses that led to it have washed up on the shores of European countries, and of America across the Atlantic. While franchising may be touched less directly than other sectors, it cannot be detached from the larger economy.

  At a minimum, Brexit will affect the plans of companies for protecting their intellectual property, where they will locate branches, and other features of franchising which do not find their way into the “big picture” surveys we all read.

Franchising has long served as a scapegoat for a wide variety of groups unhappy with one aspect or another of economic, social or political life. From environmental pollution, animal rights, traffic congestion, obesity, biogenetically modified products, to the “malling of America,” franchising has been a convenient target for protest, without much regard for whether there is any connection between the franchising method of distribution and the object of the discontent.

When this scene shifts abroad, the complaints are augmented by a generalized sourness about the perceived “imperialism” of U.S.-based multinationals and the alleged effort to supplant local culture, customs and language with “the American model.”

In a time of international tension, now made vastly more dangerous by terrorism and war, there are very real potential drawbacks in some parts of the world in operating an “American” franchise. How U.S. franchisors address that challenge will be one of the most interesting, and more important, features of international franchising in the years ahead.

If all of this is being read as negative, then the message has been distorted in its delivery. The import of these currents running just below the surface of international franchising is that it is a more complex, more demanding and more nuanced undertaking than many companies realize.

It is indeed a powerful force, and no responsible franchisor can ignore what it has to offer. But it is no longer enough, if it ever was, simply to ride the wave.

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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