The State Of International Franchising
Why so many U.S. franchises are sold on overseas expansion . . . and how international franchisees can benefit
When the word "saturation" started crossing the lips of industry experts a few years back, many franchisors started looking overseas for markets that might accept their uniquely American way of doing business. What they found was a garden of markets ready for growth.
"The concept of franchising is strong overseas," says Marcel R. Portmann, vice president of emerging markets and global development for the International Franchise Association (IFA). "The number of U.S. franchise companies expanding outside the U.S. border is growing steadily." Currently, the IFA counts approximately 300 U.S. companies (of about 2,000 total) that have international franchise operations.
International consumers are embracing franchise concepts, agrees international franchise consultant Kay Marie Ainsley, managing director of Michael H. Seid & Associates in Troy, Michigan. "Although it varies from country to country and industry to industry, consumers all over the world want access to products offered through franchising," she says.
Products ranging from hamburgers (of course) to services like postal delivery have been big hits in international markets. And franchises like Mail Boxes Etc. are responding. Of the postal service company's 4,300 units, almost 900 are located outside the United States in 72 countries. In total, the number of new overseas franchise locations increased by more than 40 percent in 2000, and experts think the trend will only increase this year.
"The building of our brand outside the U.S. is a core objective for our company," says Peter Holt, executive vice president of franchise sales and development at Mail Boxes Etc., who also serves as chair of Glomark, the global marketing committee for the IFA. "We see international franchising as a huge growth opportunity and a strategic part of building our business."
The company recently signed master license agreements covering five countries and three overseas territories in the Caribbean region. (Rather than sell to individual franchisees overseas, franchisors license individuals in particular countries as "master franchisees" and give them the right to sub-franchise the concept.)
Even U.S. companies that don't franchise at home, such as Starbucks, are franchising internationally. "These companies know their business, but they aren't aware of the culture or the legal details of setting up in other countries," Ainsley explains, "so franchising makes a lot more sense."
Julie Bawden Davis is an Orange, California, writer who specializes in small- and homebased-business issues. She often contributes to The Los Angeles Times and The San Francisco Chronicle.
Why Global Markets Are Embracing Franchising
Experts see various reasons for the increasing interest and expansion of U.S. franchises into the global market, including more readily available financing for franchisees and unprecedented technological advances.
"The power of the Internet has a great deal to do with the acceleration of franchising overseas," says Holt. "The Internet allows people to share a wide variety of industry-specific information, such as marketing ideas, logos and operations manuals. Easy access to such information has opened up franchising to just about anyone. It's no longer necessary to have a factory; all you need is a phone and a computer."
International markets have also embraced franchising because many countries are experiencing workplace trends common in the United States. "The U.S. trends of downsizing and re-engineering are clearly extending into international markets," says Holt. "As a result, people laid off from middle and upper management positions find themselves with severance packages and a desire to run their own business."
Ainsley does see a downside to franchising's popularity overseas: "All this success makes for a more competitive business climate. Franchisors indigenous to other countries, such as Germany and England, are coming into the market. And in response to all the activity, a number of countries have increased franchise regulations."
Franchise Buying Checklist
Potential franchisees interested in buying a global franchise should keep the following tips in mind:
1. Investigate before investing. Understand what type of business you're buying and make sure it works in your particular market. Adaptation to your local culture is a must. Also keep in mind that it's easier and more cost-effective to introduce a new brand of something that already exists than to introduce a whole new product.
2. Get involved with a concept you truly like. Can you picture yourself in this business 20 years from now?
3. Consider the cost structure. What will it cost you to support sub-franchisees? What are your projected royalties? Will you be able to cover your costs and make a profit?
4. Visit the franchisor before buying. Make sure you clearly understand the franchise concept. Attend the franchisor training program. Also ask what sort of an infrastructure the company has to support overseas business. Does the company have the resources and staff to support you?
5. Talk to several companies in the same industry so you can make a good comparison.