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Franchising Insight

Service Franchises Are Going Global
October 14, 2004
URL: http://www.entrepreneur.com/article/72902

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Global expansion tempts franchised service providers. But some U.S. business concepts don't translate easily overseas.

Looking for a luxury apartment in Brussels? A house with a pool in Madrid? A condo overlooking Kowloon Bay in Hong Kong? Just call Century 21 Real Estate and an agent in a signature gold jacket will show you around.

The Parsippany, N.J.-based real-estate franchiser has 1,384 offices in Europe and Asia, including 58 in Hong Kong, 19 in Spain and 77 in the Belgium, Netherlands and Luxembourg region. Its sister companies at franchising giant Cendant Corp.--ERA and Coldwell Banker--also have hundreds of real-estate franchises, and thousands of local agents, across the globe.

C. Javier Parraga, vice president of international development for the Cendant Real Estate Group, says overseas franchisees use his company's tools and systems to create similar-looking offices in their 100 home countries. "They look at what's done here in the U.S. like an M.B.A. case study, then figure out what practices make sense in their country, adapting for language, law and customs," Mr. Parraga says.

It's a lesson stretching beyond real estate. Just as fast-food franchises flooded the world in the 1990s, service franchises are riding a second wave of expansion. William Edwards, president of Edwards Global Services in Irvine, Calif., helped many U.S. food and retail franchises expand overseas in the 1980s and 1990s. "Today," he says, "90% of our clients are service franchises. The U.S. has developed the best customer service in the world, and it's given our franchisers a competitive advantage." Unlike restaurant franchises that can adapt to local tastes, services concepts don't travel easily. In some countries, in fact, the local demographics, customs or economics stop certain concepts in their tracks.

Like their restaurant colleagues, some franchise systems that provide services to consumers and/or businesses turned to international expansion after reaching their local saturation points. During the International Summit meeting at the International Franchise Association's annual conference in March, several domestic franchisers said that they were maxed out domestically and looking overseas for future expansion. Roto-Rooter, a plumbing service provider of the Chemed Corp. of Cincinnati, reached 92% market coverage in the U.S. before launching franchised networks in the United Kingdom, Japan, China, Indonesia and Singapore.

Brand Awareness

At the same time, global consumers raised on McDonald's and KFC chicken are hungry for more international brands. Mark Abell, head of the franchising practice at Field Fisher Waterhouse, a law firm in London, says the perception that U.K. hairdressers are "cool and trendy" has fueled overseas expansion for franchised salons Toni & Guy and Mahogany.

Trendy local and foreign brands are especially important to the 35 to 40 million Chinese households whose equivalent earning power allows them to lead middle class lives. A recent survey by retail consultant Kurt Salmon and Associates of Atlanta of people in Beijing, Shanghai and two other Chinese cities shows that such consumers now prefer quality and brand names over price. "Chinese with more discretionary income want to be seen as using the services of a more sophisticated provider," Mr. Edwards says.

In Europe, the 25-member European Union makes it easier to transport goods and people across borders. A German master franchisee of Cartridge World, an Australian-based company that refills printer cartridges, for example, plans to use his Hattingen store to train franchisees from Belgium and the Netherlands.

And thanks to the Internet and Microsoft's ubiquitous Windows operating system, computers everywhere suffer from the same glitches and viruses. Wilson McOrist, an Australian who founded Computer Troubleshooters in 1997 in Sydney, now has 380 franchises, mostly in the U.S., Europe and Asia.

"Places like India, Hong Kong and Singapore are easier to expand into because they work in English," Mr. McOrist says, "but I find creating franchises in places like Kuwait, Portugal, Spain, Mexico and Holland delightful because of the language and cultural differences."

The franchise model also changes in small ways from one country to another, he says, as do technician fees. The franchisee Mr. McOrist recently trained in Delhi, for example, charges 200 Indian rupees (US$4.32) for each 30 minutes of work, while the New York franchisee's fee is $75 per half hour.

The U.S. and Japan share another problem--an aging population. By 2025, one out of every four people in Japan will be over age 65, says Yoshino Nakajima, director of international development for Home Instead Senior Care in Omaha, Neb. "For generations," Ms. Nakajima says, "family members were expected to look after the elderly. But now Japanese women work, or play tennis or take cooking classes and are looking for other options."

In less than two years, Home Instead's Japanese franchisee, the Duskin Corp., a large service-franchise company, has grown to 30 offices. "Almost 70% of the service there is companionship--helping older people read, write letters, or do their hobbies," says Ms. Nakajima, "something so new to Japan that we had to create a word for it."

Low-Wage Competition

Home Instead's model will not work in other parts of Asia, warns Ye-Sho Chen, a professor at Louisiana State University and an expert on franchising in China. Taiwan also has an aging population but allows so much foreign cheap labor into the country from Indonesia and Thailand that "there's no shortage of inexpensive helpers to take care of seniors at home," he says. "In China, there's a seemingly unlimited supply of workers willing to take low pay, many of whom now work as maids and also take care of seniors."

That wealth of cheap labor also stymies the expansion of home- and business-cleaning franchises into most Asian countries. U.S. concepts Molly Maid (residential) and Coverall and Jani-King (commercial) and the U.K.'s CleanTastic International (commercial) are thriving in Northern Europe. "But why would you want to pay a royalty for a cleaning system in China or India," asks Mr. Abell, "when you can hire an army of willing cleaners for a few yuan or rupees a day?" Low wages and local service traditions make it difficult for cleaning franchises to move into Southern Europe as well, Mr. Abell says.

Business-to-Business Success

Franchised businesses that provide services to other businesses tend to fare better. Mr. Edwards says that U.S. franchisers Sign-A-Rama and mailing-and-packing systems the UPS Store and PostNet are attractive to international franchisees because they can use smaller locations than food franchises and make smaller investments per unit. The Regus Group, based in Chertsey, England, a provider of office space and conference rooms, is also riding the expansion wave and has 650 business centers in 52 countries, including Korea, Thailand, China and Japan.

But the success of imported service franchises could be short-lived if local entrepreneurs start similar businesses. Once a product or service becomes popular in China, Dr. Chen says, "nimble copycats will follow sooner or later to erode the market." Once a couple of Japanese companies saw the success Duskin is having with Home Instead, they started experimenting with elder-care franchises of their own, Ms. Nakajima says. "But our key to success is our caregiver recruitment, selection and education programs that took years to develop. Sure, someone else can create a similar company. But can they be profitable?"

Cendant's Mr. Parraga is even less concerned. The largest local competitor to Century 21 in Europe is Tecnocasa, and it has offices in only Spain, Italy and Hungary. "In most countries," he says, "the real-estate industry is 25 to 30 years behind what we have in the U.S. Our biggest competitor in Europe and Asia is ReMax, another U.S. franchise company." And its agents don't wear gold jackets.

Correction: An earlier version of this story incorrectly quoted Kurt Ullman as saying The UPS Store (formerly Mail Boxes, Etc.) is "maxed out domestically." It also misidentified him as the company's director of international development and incorrectly stated he was leading an expansion from San Diego, California, into 62 other countries. He's no longer with the company and never said or intimated that Mail Boxes Etc. or The UPS Store was maxed out domestically or elsewhere.

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