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The road to international franchise expansion

By Anita du Toit

As franchise companies prepare to expand their brands internationally, they quickly learn that there are many hurdles which need to be overcome. The sobering truth is that a franchise system which is successful in its home country may not necessarily translate into a success overseas.

Despite the world getting smaller due to a globalising economy, increasing travel and ease of communication; differences in cultural, legal, and local business practices seem to become magnified with increased interactions.

Therefore, before embarking on an international franchise development programme, companies need to thoroughly assess their domestic operations, their ability to support potential international operations, and their financial capability to fund a successful international expansion.

Careful planning is vital
The first step is to determine which market or country is best suited to your business. Of equal importance is to choose the right overseas partners, while at the same time observing cultural and language traditions. When you decide to take your franchise concept overseas, it would probably be best to start with English-speaking countries such as the USA, UK, Ireland, Australia, and New Zealand.

Global market outlook
Every brand must analyse international expansion based on the viability, demand and need for its products or services. For certain service brands, the focus may be limited to the developed world; in which case, there will be a limited number of prospective countries. For other brands, such as quick-service and casual dining concepts, the emerging markets and BRICS countries (Brazil, Russia, India, China and South Africa) offer greater opportunities. However, penetrating these markets requires in-depth research as well as international savvy.

For your brands’ entry to be successful, the other country’s banking system must be transparent and provide a clear mechanism for repatriating royalties, and also have a legal system that protects trademarks and intellectual property.

It is also important to consider the difference between mature markets that already have providers meeting this particular need, and emerging markets. You should further assess potential countries based on economic conditions for franchising, overall economic stability and growth, the total size of the market for your type of business and the growth potential, as well as government regulations in terms of franchising.

Does the model translate?
International prospects will be looking for a proven brand with international appeal, refined systems, and ongoing training and support. They are also looking for a culturally-attuned management team that will be willing to listen and adapt the brand according to local idiosyncrasies.

To determine whether your brand ‘fits’ that environment, it is imperative to find a good local partner. In business it is all about relationships, and that is even more relevant when it comes to expanding internationally. In this regards personal contacts can make all the difference.

Therefore, when you decide to do business in a different country, the best thing you can do is to personally go there and meet with the necessary people, so that you can undertake a thorough assessment of the trading environment to ensure that this new market will be open and hospitable to your business.

You need to only profile countries that would adapt to your service model and have a large enough population made up of dual-income couples and busy families, or have a middle class that would need your type of service.

Language
It is advisable to use the native tongue of the market you wish to target for your marketing campaigns, as most people are turned off by foreign languages. Therefore, if India is you new market, all your marketing should be done in one of the local languages.

It is also important to accept that your product will need to be marketed from scratch in your ‘new’ country, as it is likely that your product is not known in this new market.

Legal considerations
It is important not to rely solely on contractual relationships when expanding internationally. Understanding that many countries do not have a structured legal environment will help in successfully expanding a brand internationally. In many other countries, people conduct business based on relationships first, rather than relying on a contract.

Many countries have adopted or are considering regulations for franchising. These complex regulations call for disclosure obligations on the part of the franchisor. Although these regulations are aimed at protecting investors from fraudulent or inexperienced franchisees, they may end up overwhelming investors and making the transaction more cumbersome. Therefore is vital to consult with local legal and franchise experts.

When it comes to negotiations, it is important to avoid adhering rigidly to every principle of the franchise agreement, rather leave room for compromise.

Trademarks
The franchisor should seek out trademark protection as early as possible in the process to avoid dealing with creative entrepreneurs or so-called pirates that register your trademark and offer to sell it back to you.

In recognising the importance of protecting their intellectual property, more and more companies are hiring firms that provide international trademark and domain name monitoring to ensure that there are no existing conflicts with trademark applications.

Structuring the arrangement
The preferred structure for international expansion has up to now been the master franchise agreement. However, many experienced franchise companies also use the area development structure. You can also opt for a hybrid arrangement, which begins as an area development agreement and evolves into a master franchise structure. It must be emphasised that in drafting these agreements, the fundamental obligations of the franchisee and franchise organisation must be maintained.

Normally, the master franchisee is granted the rights for a specific territory and a specific number of units to be developed. The franchisee also receives the right to sub-franchise the concept to other franchisees.

An area developer, on the other hand, is granted a territory and a number of units that a franchisee must develop on his own, without the right to sub-franchise to third parties. A hybrid structure allows an area developer to develop a certain number of units before becoming a master franchisee and then sub-franchising to others after undergoing a thorough operations review.

Domestic operation
You have to keep in mind, however, that if you have a fast-growing domestic brand, international expansion can potentially add a lot of cost for a small incremental return. This type of venture requires investment and capital, but more importantly, it can take up a lot of your time. If you are expanding overseas and oversee the process yourself, your domestic momentum could suffer.

To succeed abroad, the franchisor must have a very good understanding of how the system is run and operated in its own backyard, in short, every aspect of the franchise’s domestic operations needs to be under relative control.

The reason for this is that valuable resources will have to be committed to the expansion programme. Sometimes, franchisors are already spread thin trying to keep up with their domestic development and operations. International expansion will require time, money and human investment which, at times, may be difficult to divert to this new undertaking.

Being able to fully commit the appropriate resources to the expansion will increase the chances of a pay-off in the long-run. In addition, success is always much more likely if the brand is well-established, recognised and strongly associated with the products or services offered in the domestic market.

Ultimately, franchising is all about promoting the brand to strengthen the network for the benefit of all involved, therefore a miscalculation, even in a country thousands of kilometres away, may have repercussions for the domestic operation.

On the other hand, a well planned and executed international expansion will solidify the concept. International development can be a very rewarding experience, but franchisors need to be honest with themselves about how prepared they are to embark on this new adventure.