Global Warming

Franchising heats up around the world.

Magazine Contributor

April 1, 1997 10 min read

This story appears in the April 1997 issue of Business Start-Ups magazine. Subscribe »

For franchisors, the promised land is one that is ripe with untouched territories and teeming with inhabitants eager for a taste of franchising's fruits, a place where ugly words like "encroachment" and "saturation" have not yet been uttered. Imagine, then, the excitement--nay, the elation--ringing through franchise systems across the United States as the world opens its arms to embrace the joy franchising offers.

Like explorers of old, American franchisors are striking out in a race to claim these lands for their own. "If you had to pick one trend in terms of where franchising is going in the next 10 years, the real growth is going to be in markets outside the United States," says Mark Siebert, president of Francorp Inc., an Olympia Fields, Illinois-based international management consulting firm specializing in franchising.

According to a recent survey of 40 countries by accounting and research firm Arthur Anderson, 56 percent have fewer than 200 franchisors. Countries outside the United States boast an average of 252 franchisors and only 12,253 franchisees. "Some of these international markets [are seeing franchise] growth of 40 percent a year," says Siebert. "There's never been a greater opportunity for franchisors to go abroad."

The call of international franchising is getting harder for even the smaller franchisors to resist. "An increasing number of American franchisors are looking at the international option sooner. In many cases, the rationale for that is they are either dealing with a highly competitive domestic market, have saturated the domestic market, or simply perceive the great opportunity abroad," says Siebert. "In fact, smaller franchisors are where a lot of the [international] growth is coming from these days."

Being caught in the whirlwind that is international franchising can be intense. "Basically, the whole thing is kind of odd," admits Rich Rector, president of Realty Executives International, a real estate brokerage franchisor based in Phoenix. "I don't have an office in Austin, Texas, and yet I have an office in Bangkok."

When Realty Executives started franchising in 1988, Rector intended to establish a presence throughout North America and never expected to be jolted into his two predominant foreign markets--South Africa and Thailand--quite so quickly.

So does it sink in that Rector now has seven offices in South Africa and 26 locations in Thailand? "If you had asked me five years ago about international franchising, I would have talked about North America. I hadn't any clue about [any of this]," he says. "It's really weird."

Weird or not, it's definitely lucrative. "I can make a lot of progress [in Bangkok] without making a bunch of mistakes and taking time deciding between steps," says Rector. "That leads to incredible opportunities."

However, Rector also found obstacles to international franchising can be sizable. His first challenge in Thailand: overcoming the cultural taboo against selling a home. "Things have always been handed down through the family," says Rector, "so if a house is for sale, it's assumed there are financial problems."

On an industry level, Rector faced the task of breaking into a country that didn't even recognize residential real estate brokerage as a business. "There's no licensing law, so there's no regulation of who can or can't be a real estate agent," he says. Rector and his Thai affiliate professionalized the industry by creating a school to educate people about the process and helped to form a trade association to demonstrate their professionalism to the public.

For franchisors who brave uncharted foreign territories, extra effort is almost always required. And, for an industry that's traditionally relied on the ease of a cookie-cutter approach, being flexible enough to make these efforts is sometimes as difficult as turning a huge battleship on a dime.

"Different countries have different foods, different clothing, different modes of business etiquette," says Leonard Swartz, worldwide managing director of franchise services for Arthur Andersen in Chicago. "Today's [franchises] must adjust their domestic businesses to meet the international cultures. They must be firm and command quality, while remaining flexible."

Breaking Barriers

Though the luxury of uniformity may not be accessible when doing business overseas, U.S. franchisors that persist through the trial-and-error period seem to learn certain secrets to success. Some of these secrets include:

Market research: "All too often, companies determine an international expansion strategy based on a reactionary strategy--they happen to get an inquiry from Kuwait, and all of a sudden they're interested in the Kuwaiti market," says Siebert. "Franchisors should target certain regions. As part of your research, determine what markets are going to be big for your product or service, what current competition is serving those markets, and any barriers to entry."

To connect with businesses and U.S. embassies in other countries, Siebert suggests attending overseas trade missions or trade shows put on by organizations such as the U.S. Department of Commerce. Yet don't expect the quality of market research to match that of America.

"In many countries, there isn't enough marketing information," says Swartz. "You have to get out there and pound the pavement."

Capitalization: Siebert lists undercapitalization as one of the most common mistakes U.S. franchisors make. "They don't know they're making a significant commitment to the success of their foreign licensees, and it's conceivably going to cost them a lot of money in the first several years while units are getting established in that market," he says. "The real profit centers are not [franchisees'] upfront fees but the ongoing stream of royalties generated from successful penetration of a market."

Using a master franchisee: Perhaps the most important decision franchisors can make is the choice of a counterpart in a foreign country. Siebert estimates as much as 90 percent of your success overseas comes down to this one decision.

Of the available options in opening overseas locations, master franchising is the most popular--and for good reason. Master franchisees take the burden off the American franchisor, providing the most valuable asset of all: an insider's savvy.

"It's good to have someone there who knows not only the language but also the laws and, beyond the laws, the traditions," says Rector. "They tell you the things you need to know that can save you from embarrassment. They can speak for the country, and you're rewarded by their expansion as well."

A caveat: The risks involved in putting so much responsibility in one person's hands are high. "If you select the wrong person," says Rector, "you could essentially be kept out of the market until you figure that out."

Follow-up support: "A good franchisor will continue to research and provide overall guidance and growth to licensees," says Swartz.

Part of the importance of follow-up is protective as well as supportive. Rector has pinpointed effective ways of keeping tabs on his licensees overseas. "There are various criteria we can track very easily each month," he says, "and if they are not being met, we can either reduce the territory or cancel the contract."

Laws and regulations: Worldwide uniformity of regulations seems unlikely, and perhaps even undesirable, as "each country has its own special needs [and can] best determine what information its citizens need," says John Baer, a franchise attorney with Keck, Mahin & Cate in Chicago. "You normally can't use the same franchise agreement or the same system you use in the United States."

Yet Baer has faith that American franchisors will rise to the occasion. "U.S. franchisors are used to doing disclosure in America, and disclosure in other countries is usually easier," he says. "To the best of my knowledge, [legislation] hasn't impeded anybody from going into another country."

Visit the country yourself: Rector was overwhelmed upon visiting Thailand for the first time. "To see what was going on--the transportation, the technology, the emerging middle class--made a huge difference," he says. "Now I have a visual perception of what's going on there, and it's easier for me to talk with my franchise owners about those things."

Worldly View

What's most interesting about this wave of international franchising is not just its size but its apparent endlessness. "There's a gold rush for U.S. franchises," says Siebert. "And because the large franchises are already taken, relatively small franchisors are able to get into these markets early."

By most standards, this is an ideal time for franchising--and in many countries, it's nowhere close to peaking. In fact, considering the mutual admiration between foreign businesspeople and U.S. franchisors, Swartz describes the international franchising boom not as a mere trend but rather "as a direction. This is not something that's going to subside."

Words Of Wisdom

We asked Don DeBolt, president of the International Franchise Association, for his views on international franchising.

Entrepreneur:How would you characterize the growth of international franchising?

Don DeBolt: It's been explosive. We have many major companies now that are deriving more profits from their overseas activities than they are from their domestic ones. That's how important globalization has been.

Entrepreneur:What's the general attitude of franchisors toward foreign markets?

DeBolt: There's a certain measure of excitement, but the surveys still indicate most companies are reacting instead of acting. In other words, they're responding to inquiries as opposed to staking out very definite markets that they have prioritized as being most significant for their companies' concepts.

Entrepreneur:What impact will international franchising ultimately have on the industry as a whole?

DeBolt: A hugely positive one. There are so many countries that need this. Though they may have had problems to deal with, every company that's gone overseas has indicated if they had it to do over, they would do it again.

Success Story

Though franchising internationally can be daunting, some manage to make it look downright easy. When Khalid Naseem decided to attend the International Franchise Expo (IFE) last March, he was simply exploring the various business opportunities that might work in his home country of Pakistan. A year later, he is on the verge of opening his first franchise, The Taco Maker, in Pakistan, with visions of expanding across the country.

"I thought this would take two or three years before I got somewhere," Naseem says. "But we had a good understanding with [the franchisor] and a good chemistry, so they expedited the paperwork."

Though initially surprised at how swiftly everything happened once the wheels started turning, Naseem believes moving quickly to capture the market made sense. "In Pakistan, restaurants like Pizza Hut and KFC are always packed. And Mexican food is going to work because it's spicy and is a good alternative to local ethnic food," he explains. "If you know the local market very well and can realize which industry is best for you, [franchising] is a very good opportunity to grab."

Naseem adds that the hype in American franchising circles is met, if not surpassed, by the demand overseas. "The demand is quite high, not only in Pakistan, but wherever you go," he says. "People all over the world crave American brands, so you see all the American [franchises] doing good business. Franchising is really taking off."

The International Franchise Expo (IFE), featuring exhibitors from all facets of the franchise industry, will take place April 25-27 at the Washington, DC, Convention Center. Call (201) 461-1220 for more details.