The who, what, where and why of global franchising, beyond the stats
Illustration by Jonathan Hankin
In my last column in August, I provided an overview of what’s happening in international franchising today, drawing largely on insights gathered at the International Franchise Expo at the Javits Center in New York in late spring.
Some of the matters addressed were: Where are franchisors seeking franchisees? How much of a shift has there really been away from a U.S.-centric model? How sharply have U.S. franchisors tilted from domestic to cross-border development? And is that movement reaching a plateau, or accelerating?
How accurate is the stereotype of the international franchisor? Is it, as it is widely assumed to be, a giant foodservice operation? Or is the picture a more nuanced one? And why this explosive growth? And, especially, why now?
It is in the nature of this sort of survey of developments that it rests heavily on statistics: How many franchisors are seeking franchisees in Country X or Region Y? What percentage of the largest franchisors remain U.S.-based? What share of the largest franchisors’ growth is domestic? Cross-border?
But the somewhat more in-depth examination that is the subject of this column dictates stepping away from numbers and turning to some recurring themes. In what follows, I will be borrowing shamelessly from one of my co-panelists on the Global Franchise program, Bill Edwards of Edwards Global Services. In the time-honored tradition, let’s break this down into readily digestible morsels: Why? What? Who? Where?
Why? In the euphoria of embarking on a new and daunting venture, or even of simply reacting to an overture from an overseas prospect, it can be tempting to glide over the fundamental reasons for cross-border franchising itself. I’ve lost count of the number of clients who, later confronted with setbacks, can’t quite recall what brought them there in the first place. Here are, then, some of the benefits of international growth:
- Diversification—reducing dependence on domestic growth generally, and gaining broader visibility for the brand.
- Creating new customers—consumers you would never have reached otherwise, who prefer Western brands that may carry greater prestige.
- Following your existing customers when they travel, staving off their possible consideration of “something new.”
- Growth potential, which may be markedly higher in certain emerging countries than at home.
What? What kind of franchised products and services are consumers in other parts of the world looking for today? Bill Edwards’ research and experience led him to these conclusions:
Education, especially children’s; commercial services, principally business; personal services with notable interest in fitness and in senior care; and food, especially well-known brands, including the usual suspects (coffee, burgers, pizza) but with an uptick in healthy food.
Who? First, as to franchisors themselves, there is broad agreement that to go global successfully, a franchise program should have an excellent record of success in its own country; a well-reasoned plan for entering other countries; and strong infrastructure of training support, etc.
Also, franchisors should have a financial model that offers the potential for a good return on investment to licensees. Needless to say, that must also include an acceptable ROI for the franchisor itself, keeping in mind its considerable investment in the venture.
When evaluating their prospects for success, too few franchisors give thought to what international candidates will want to know about the brand (average unit economics; ability to train and support them; business experience of the senior team; what differentiates it from other brands, especially the target country).
And what about the franchisee? Bill Edwards distills the qualities you should be seeking: Passion for the franchisor’s business, and understanding it. Successful reputation and record in its own country, and knowledge of the sector. Experienced management to run the business. Access to real estate. Marketing orientation.
And, of course, capital to start and grow.
Where? While the factors to consider are almost limitless, here are some key ingredients:
Rule of law (Can you enforce the agreement? Can you retrieve your rights if necessary and appropriate?). Country stability. Intellectual property protection.
Gross domestic product growth—a World Bank study suggests that a good rule of thumb is real annual GDP growth of 4 percent or more.
Consumer market size—but not just bodies. Do they want and can they afford your product or service?
Culture—how much would you need to adapt? And a very important one: Ability to get paid.
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That’s enough for today. Next column: Where does international franchising go from here?
Philip Zeidman is a partner in DLA Piper’s Washington, D.C., office. Reach him at 202.799.4272 or email@example.com.