Coming to America?: Overseas brands face opportunities and challenges
While many U.S. franchisors are now expanding into other countries, seeking new growth and less competition, international franchisors are finding the world's largest economy a target too good to pass up. But are the streets of the USA still paved with gold?
"Many international franchisors salivate at the prospect of entering the United States, the world's largest consumer market," says Ray Hays, senior director of EGS in a recent Entrepreneur magazine article. "Perceived barriers to entry for non-U.S. franchisors include a litigious and highly regulated legal environment, complicated multi-cultural demographics, fierce competition, and high investment requirements. In short, the U.S. market is often viewed as too expensive, risky, and complex, but many of these perceptions are overblown myths. In reality, the franchising opportunity in the U.S. far outweighs any barriers to entry," he says.
According to the IFA's Economic Impact Study, in the United States: there are more than 900,000 franchise business locations; more than 3,500 different franchises; they create more than $2.3 trillion in sales annually; 1 in every 7 jobs is tied directly or indirectly to franchising; and 54 cents of every retail dollar is spent at a franchise. Every product and service in the U.S. is provided by a franchise. The U.S. has well-defined franchising laws. And, most important, the U.S. market is open to good new concepts from other countries.
Still, there are considerable challenges for a foreign franchise wanting to succeed in the U.S. market. Trademarks, domain names, intranets, franchise advisory councils, state franchise laws, extreme sector competition, property leasing, translation, detailed manuals and systems, marketing limits, and measurement conversions are just a few of the U.S.-centric aspects of franchising that many other countries do not have. Other challenges are dealing with the large geography, the diversity of the culture and economy, and the sheer size of 310 million consumers. And often, a foreign franchisor thinks they will find a country master franchisee to develop the entire USA.
According to Mark Seibert, CEO of iFranchise, the attributes any franchise needs to succeed in the U.S. are:
- It needs to be credible. Does your company have experienced management? A track record? Is the concept proven?
- It must be unique. Is your business adequately differentiated from its competitors? Competition is high in the U.S. Does it have a sustainable competitive advantage?
- It needs to be teachable. Are the systems in place? Are operating procedures documented in manuals?
- Most of all, the franchise needs to provide an adequate return to its franchisees. In the U.S. today, franchising is all about good unit economics.
According to Darrell Johnson, CEO of FRANdata, a company that documents the performance of franchises, two key topics are important to understand before a company starts taking active steps to enter the U.S.
- Capital. How much capital will it take to get established, and what should be expected for a return on capital over time?
- Competition. Who is the target audience? Will they be receptive to the product/service? Do U.S. brands provide similar products/services now? How established are these competitors? How many use the franchise business model? What are the franchised competitors' growth models, pattern of geographic growth, franchisee characteristics, approach to product/service marketing, and strengths/weaknesses?
Thousands of U.S. franchise companies with performance histories can be analyzed in many sectors for the inbound franchisor to answer these questions before they invest.
Inbound examples abound
Jeff Elgin, CEO of FranChoice, sees a broad swath of franchises entering the U.S. "A new entrant is Metal Supermarkets. They sell odd lots of metal to companies, and there is a huge market with lots of demand for this and great margins for the franchisee. This franchise's tag line is 'the world's largest supplier of small quantity metals,' and it comes from Canada. They consider themselves the 'convenience store for metals.'" Again, filling a niche.
Le Pain Quotidien is an example of a foreign franchisor that took an intelligent, measured path to success in the U.S., says Jeff Kolton, principal of Franchise Market Ventures, who brought this high-end food brand to the U.S. some years ago. Based in Belgium, with international licensees in 17 countries, the company established an office in New York City and hired a management team with experience at building similar chains in the U.S. Instead of launching a franchise program in the U.S., they grew organically through company-owned units, slowly creating the infrastructure to support future growth. "They continue to have all their tables and chairs made by the same company in Europe to maintain brand integrity, work off the same menus for their breads, and lean toward menu consistency around the world," says Kolton.
Ichiro (Roy) Fujita, president of I. Fujita International, helps Japanese brands enter the U.S. In 2010 he helped Gyu-Kaku, a Japanese BBQ brand, enter the U.S. Today the company has 23 units in 6 states--company owned and franchised. And Fujita says they are all highly profitable.
In Australia, Alan Branch, managing director of Global Franchise Partners, is helping Floral Image enter the U.S. Floral Image founder Ben Trussell says, "The USA will be the biggest market for Floral Image and a challenge we are ready for. I smile every time I hear someone say, 'I just can't believe these aren't real, they look better than real flowers!'" Filling a niche is a very good reason for an international franchise brand to enter the USA market.
Lesley Hawks, vice president, western region, for St. Jacques Marketing, believes another Australian import will ride the wave of success in the U.S., despite delays. "I think Cherry Blow Dry Bar has been surprised at the long time it has taken to get under way here in the U.S.--selecting iconic sites, the lease process, disclosures, infrastructure, and the like. However, generally they find business much easier than in Australia, and the U.S. franchise arena much more vibrant." The brand, which is tapping into the high-end, high-growth women's hair blowout-only craze, has two sites in construction, in Florida and New York City, with a third location being finalized in Beverly Hills.
In summary, if an international franchise fills a niche in the U.S. marketplace, follows the legal requirements, has strong operating systems, training, support, and good unit economics, there is a place for the brand in the largest franchise market in he world.
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