Make the most of the global market

Many national retail franchise brands have successfully made the transition to new international markets. Roger Levitt looks at the options available.

Once a business has successfully been franchised in its homeland, its next step is usually to set its sights on overseas markets.

To do so successfully, the franchisor will need to look at the different franchise options. The franchisor could grant franchises directly to franchise owners in the target country, set up a subsidiary or a branch operation in the target country to be the franchisor, or establish a joint venture with a resident organisation in the target country.

Another option could see the franchisor granting a Master Franchise Agreement to a Master Franchise Owner, which is given an exclusive right to operate and grant franchises in a territory.

Alternatively, the franchisor may grant a Master Development Agreement, in which the Master Developer has no right to sub-franchise but is instead obliged to operate outlets itself.

There are many factors influencing which form the international expansion should take, so it is important to consider them all before proceeding.

The following are some of the main advantages and disadvantages of the above forms of international expansion, which should be considered.

Direct franchising

In most cases, direct franchising will not be preferable for the following reasons:

It is an essential element of franchising that the franchisor provides adequate consultation, back up and assistance. In most cases, this will not be possible if the franchisor is located in a different country from its franchise owners

  • The franchisor may not have sufficient knowledge of the target country
  • Difficulties may arise in enforcing obligations in the Franchise Agreement and Operations Manual if the franchisor is resident in another country
  • It is important for franchise owners to deal with what they consider to be ‘home’ businesses, and not a branch or subsidiary operation of a foreign company
  • Tax issues may arise in repatriating continuing fees and other payments from franchise owners to the franchisor

Joint venture

To overcome some of the disadvantages of a subsidiary or branch operation, franchisors may consider setting up a joint venture. The partner in any joint venture would be an existing business in the target country with knowledge of the market in that country. Often franchisors, if they decide to adopt the joint venture route, strengthen their position by requiring the joint venture company to enter into a Master Franchise or Development Agreement.

Master Franchise Agreement

The granting of a Master Franchise enables a franchisor to rely on a business entity with local knowledge of the target country. The disadvantage is that keeping control over the Master Franchise Owner requires a considerable commitment in time and resources.

Master Development Agreement

Master Development Agreements have broadly the same advantages and disadvantages as Master Franchise Agreements, except that the franchisor requires the developer itself to open and operate the franchised outlets. This approach doesn’t spread the risk for the franchisor, but will inevitably lead to greater control by the franchisor because it will have a contractual relationship with the developer. There is no direct contractual relationship between the franchisor and sub-franchise owners in a Master Franchise operation.

Global issues

Many of the issues and problems arising in franchising on a national basis arise in international franchising, but some are either unique to, or create greater problems in international franchising. Establishing the level of the initial Master Franchise Fee is a key issue. This may need to take into account costs incurred in establishing the relationship, the percentage share the franchisor expects to have in any new Master Franchise Owner company and the amount of the initial market fees to be paid by sub-franchise owners. Other issues to consider include the development potential in the proposed market, and the degree of success, recognition and market leadership of the franchise operation internationally.

It is vital that a franchise brand successfully develops its own business in its home market before considering development in another country.

It is more than just products and services that are being offered – it is a total method of sales, marketing and strategy that has been successfully adopted by the franchisor.

This is where the real value lies, as the investors will be taught everything they need to know to replicate the success achieved in the home market. They can achieve levels of turnover and profitability they couldn’t expect to achieve on their own by setting up a similar business in the same sector.

Choose wisely

One of the keys to successfully franchise abroad is ensuring the Master Franchise rights are granted to an international partner who has sufficient management, logistic and financial resources in the target market.

The local partner will, of course, usually be better culturally equipped to develop their own markets than a company from abroad. Adaptations will still be needed to adjust to local customs. This international partnership model helps speedier and smoother integration by using local knowledge, expertise and contacts.

It is essential in a Master Franchise or development relationship to impose obligations to establish the franchise and to set the criteria for achieving this. The aspirations of the local Master Franchise Owner might not be the same. The foreign franchisor will want to expand quickly in order to obtain a flow of continuing fees.

By contrast, the Master Franchise Owner or developer will wish to be sure of success before investing too large a sum and will, therefore, usually argue strongly against setting minimum targets until the viability of the franchise has been tested.

Usually the development schedule setting out the number of units to be opened in, for example, the first 10 years of the agreement will take a conservative view of the market potential of the overseas market.

Finally, always remember that franchising is not a quick fix for developing a new market. For the retail franchise to grow successfully it will take time, commitment, patience and the ability to work in partnership with the Master Franchise Owner.

Finding the right Master Franchise Owner who shares these attributes and creating a development schedule should never be rushed.