International franchise development is a very mature and supported method of business expansion, not only in the Americas and the U.K., but throughout Europe, the Middle and Far East, Australasia, and certain parts of Africa.
Growing a business internationally through franchising, however, will involve certain key elements of what is needed to set up a company-owned network in the same country. Plus, the application of the franchising techniques and know-how needs to be paired with the correct local positioning of the franchise proposition and the identification of the most ‘appropriate’ local franchisee.
The success of the operation and network will depend on those key factors. Therefore, taking the franchising option as a route to develop a franchise system in international markets should not be viewed as a quick and easy option. It is doable, but requires strategic planning based on knowledge, expertise, sufficient resources and stamina to last the possible initial slow development. Whether domestically or internationally, franchising is often proposed as if it were some sort of magic and mysterious force that will turn any business into an overnight international success…. but it isn’t! It is simply a format of doing business like any other. Done well, international franchising can lead to speedier expansion, a more self-motivated local sales force who understand local issues better, better organization and systems, and more control of front-line sales, marketing, management and delivery processes.
Many companies large or small also believe that because they know how to run their owned and operated businesses well, domestically or in a few markets, that they will be able to successfully franchise the business in all international markets equally well.
This only follows if they have properly considered the future needs and demands of their overseas franchisees. For instance, how different is the need of the Polish franchisees from those of future franchisees, say, in Kuwait?
And how different are those from the needs of employees and the current best practices in the international franchise industry? To do this most effectively, usually requires a franchise qualified and objective outside perspective coupled with the experience of the corporation – not in isolation.
Get your planning right
International franchising requires careful and cohesive strategic planning, management and execution, as well as the commitment of all the respective discipline heads to the franchise operation as a franchisor, behind the venture, for it to be sustainable and successful. It should not comprise the quick wave of a magic wand or a half-hearted modification of domestic business models, as regrettably some consultants may lead potential franchisors to believe!
International franchise expansion can be an extremely lucrative strategy for those who meet the necessary prerequisites to last the journey.
In my long-standing involvement in international franchising, both as a corporate employee sitting on a board of major PLC companies and SMEs, as well as 22 years of consultancy, I have seen many examples of companies reacting to an enquiry from another country which offered to hand over a blank cheque for the rights of the franchisor’s brand to their market, but this often led to the recipient of that enquiry rushing to the lawyers to draft a franchise contract while busy booking their return air ticket to some exotic shores to sell their franchise.
In reality, this reaction has often led to numerous graveyard stories, and has created a misconception of whether or not international franchising is worth the risks.
There are fundamental preparatory steps a potential international franchisor should take to ensure – as far as possible – it has a sound international development strategy.
Some of the key points of considerations are highlighted here as a starting point, each of which needs to be carefully and comprehensively analyzed, ideally with experienced advisors who have the international and local long-standing franchise perspective.
Once a realistic assessment of domestic operation has been conducted and the potential franchisor is reasonably certain that it has the necessary resources, stamina and focus to enter the international franchise arena, it should:
- Identify the appropriate markets, by undertaking certain level of research and conduct SWOT analysis on its strategy based on market conditions
- Decide on the most appropriate franchise route to each market
- Undertake all the key franchise preparatory tasks to finalize the franchise proposition, offering a complete service package
You should also prepare the country business plan for that specific market, which should address the following:
- An estimate of their sector market potential, existing competitive analysis, existing sites which meet their criteria and estimate possible turnover for the length of the contract as well as logistics of site development and importation of key products / ingredients. This should hopefully be based on some authoritative data and in the absence of this, they should make some intelligent estimate based on parallel experiences
- Determine the exact type and level of support and reporting format, as well as the exact timing of provision of support to the franchisee
- Subsequently ascertain the full cost structure to themselves and the franchisee in setting up the business as well as scope all parties’ revenues
- Assessment of the full impact on resources both existing and dedicated for all parties
- Run hypothetical financial models for the franchisee and themselves
- Determine detailed preparatory tasks and related time frames, for entry into the selected international markets and measure the impact of the entry on other priorities within the domestic operation
Many international franchisors, particularly at the initial stages of their overseas development select their ‘priority’ destinations by reacting to one or several ad hoc enquiries from overseas markets, rather than assessing the true viability of expansion into those markets, based on an effective and well-planned business development strategy.
Quite often this leads to the selection of the wrong franchisee, an inappropriate franchise entry method, reactive franchise support, offer of too big a territory or not large enough of a territory, and over or undercharging
fees. Clear and relevant sets of assessment criteria should be considered to select the future overseas markets.
The criteria should cover:
- Size of the market
- General business infrastructure
- Government structure – possible state/private funding for regional franchise developers
- Current and future trends
- Local legislation affecting production and retailing of your products or provision of your services – any local accreditations or regulatory requirements for your concept
- Demographics, working population, age profiling and geographical concentration of working labor, general lifestyle, GDP, socio-economic factors
- Ease of doing business (language, rule of general business as well as experience with European business practices)
- Geographical proximity to the domestic base (ease of travel and communication – a much greater issue in franchising, since visits will need immaculate planning and a franchisor representative should not just “pop in” at will to a franchisee’s business, because its representatives were just passing by the continent!)
- Level of demand on existing management resources
- Level of adaptations from your existing offer and service proposition
- Common profile of franchisee candidates, to ensure relevance to the market place. Aiming at markets where provision of high caliber product and services is viewed as a serious business proposition than a haphazard venturing into this sector in an unprofessional way
- Likelihood of generating returns in 1-3 years. This will obviously depend on the existing competition, degree of market potential, the ability to apply realistic revenue and fee structure and the cost of setting the necessary infrastructure and kiosks, and supporting the business both for you and the franchisee
- Once decided on the profile of the appropriate regional franchise developer, your own capabilities in recruiting suitable franchisees with that desirable and essential profile to develop its franchise network expeditiously and efficiently and where marketing of the franchise and the concept is easier due to local contacts
- Franchisees’ capabilities to recruit and train enough staff for all the pre-agreed number of kiosks/units to be opened and availability of sufficient local appropriate manpower to support the franchise offer
- A market in which the franchisee can implement a seamless product and service offers to customer base while maintaining your high brand reputation while charging a decent ticket average per customer/client to make the proposition financially viable
- Political stability/ease of repatriating franchise revenue, as share gain where management services fee and royalties will be generated in the local market, which should always be charged net of local taxation
- Degree of acceptability of the franchise in that local market i.e. previous successes and failures with other franchise concepts
- Barrier to entry as a franchisor and barrier to franchising
- Franchise legislation and restrictive practices
In the U.K., there are perhaps 100 or so large and small companies that could claim to have achieved solid international franchising success. Examination of these would show that all, or most, of the attributes described above would apply throughout.
There have been several – mostly unpublicised – disasters, and the basic reasons for these are worth examining…
What to avoid when expanding internationally:
The franchisor banked upon the initial franchise fee and royalties to provide investment capital for the business
- The franchisor did not have a sufficient track record in its domestic market and had highly underdeveloped operating systems
- The franchisor went to a country where they got the enquiry without conducting proper research to ensure there was sufficient market potential and that support logistics were favourable
- International franchise development was in response to a travel bug rather than a pre-planned and thought through strategy. You may smile at this naivety, but 40 per cent of our client base share points 2 and 3 when defining their reasons for overseas expansion! Needless to say, they will not remain a client for long, unless they agree to change the basis of their overseas strategy
- The franchisor did not create an organisation structure with the correct ethos capable of dealing with franchising
- The franchisor did not develop a well thought-out and developed franchise offer package
- The franchisor did not develop an appropriate business offer suitable to the local market trends and variables or there was not sufficient margin in the business to sustain financial profitability
- The franchisor did not adapt their culture to achieve a balance between ‘stick and carrot’ and support in a fair and flexible way
- The franchisor set fee levels which did not allow a sufficient return to the franchisee
- The franchisor did not demand high standards from itself or franchisees and made too many concessions and adopted reactionary management style
- The franchisor did not encourage two- way communication with franchisees
- The franchisor did not commit to a long-term investment horizon in key areas of supporting an international franchisee, such as international brand development initiatives, full CRM adaptation and IT monitoring and reporting methodologies
It is worth noting that none of these causes of failure are attributable to franchisees, but it is attributable to a misled, badly advised or unprepared franchisor.