What Will Franchising Look Like in Cuba? 3 Clues From Similar Markets.
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Let's be real: if and when franchises open up shop in Cuba, they won't have to reinvent the wheel.
Cuba is hardly the first country is to open its gates to American franchises. However, when the U.S. announced it was moving forward toward more normalized relations with Cuba, it seemed like everyone was losing their minds about franchises taking over the country.
Instead of freaking out about the uncertainties of franchising in Cuba, here are three countries with certain similarities to Cuba that can offer key lessons for potential Cuban franchisees.
China: Be prepared for uncertainty.
Despite doomsday predictions of a country overrun by McDonald's, it will likely be at least a few years before the first franchises start opening up shop in Cuba, says Scott Lehr, the International Franchise Association's senior vice president of international development and conferences. If we look at China as a guide for communist governments sorting out franchising regulations, it is going to be a rocky couple of years.
While today, fast-food mega-chains rely on China for a huge portion of their profits, U.S. franchises only entered the country in the late '80s, with KFC becoming the first Chinese franchised location in 1987. For at least the first decade of franchising in China, regulations were unclear and constantly changing, making investments risky and unstable.
While franchisors support new locations, it is ultimately franchisees taking the biggest risks as guinea pigs in new countries. New franchisees in Cuba will likely be local entrepreneurs figuring out the ropes in a country still grappling with its approach to private business.
In China, the risks have been worth it. The country's population of 1.3 billion and exploding middle class makes it the perfect market for franchises expanding internationally. Meanwhile, Cuba has a population slightly more than 11 million. While Cuba’s middle class is reportedly growing with increased entrepreneurship and economic freedom, citizens are nowhere near China in terms of personal spending power. The regulatory uncertainty may be the same in China and Cuba, but the payoff in Cuba is nowhere near as big.
Indonesia: Target the tourist market.
Jay-Z and Beyoncé are not the only tourists visiting Cuba. Tourism is a major economic drivers in the country, something that is only going to grow now that Americans can visit more freely. In a country where most citizens have little disposable income, potential franchisees should follow the example of franchisees in other tourism centers, like Indonesia, and focus on tourists to bring in the dough.
Tourism is a key pillar of Indonesia's economic growth strategy, accounting for nearly 10 percent of the country's GDP in 2013 according to the World Travel & Tourism Council. Much of this profit tied to franchising, with hotel chains such as Marriott and Hilton opening locations in the country.
“Certain people will seek out those international brands,” says Lehr, on tapping into the hotel market to attract tourists. A well-known hotel franchise where tourists can expect a certain standard of care helps make a country a more compelling choice for a picky tourist. According to Lehr, tourist-centered franchises such as hotels can help pave the way for other future franchises as tourism brings increased economic prosperity to a country.
Certain players in the hotel industry are already eager to scope out the franchising options in Cuba.
"We welcome further opportunities to continue our rapid growth and deliver a warm welcome and exceptional experiences to guests in even more parts of the world, including Cuba if an agreement is reached with the U.S.," says a Hilton Worldwide spokesperson. "Our founder Conrad Hilton often spoke of 'world peace through international trade and travel,' which remains just as important and core to our business today."
Dominican Republic: Don't get too excited.
Despite its communist government and tourist potential, Cuba is first and foremost another Caribbean country. So, it will ultimately engage in franchising similarly to neighboring countries like the Dominican Republic.
The Dominican Republic has roughly the same population as Cuba, with more than 10 million citizens. Most major U.S. franchises, including fast-food chains, real-estate companies and even gyms are present in the country. While franchising makes up a “thriving and expanding” sector in the economy according to the U.S. Commercial Service, few franchisors credit the Dominican Republic as a major driver of business as they might swiftly-growing Asian markets.
"It has primarily been the food and the hotel brands who have done best [in the Caribbean],” says Lehr. “It's not a huge, huge market."
Looking at the Dominican Republic is a good reminder that while franchising in Cuba is exciting, it's not necessarily a game changer for the franchising industry.
"The overall feeling generally is, it's a big world out there," says Lehr. "There are other, bigger markets that are more lucrative.”"
Related: No, McDonald's Won't 'Ruin' Cuba