Why Franchising is Going Global
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Why Franchising is Going Global

Taking a franchise brand international is, in a sense, the final frontier for growth. It's where many franchise brands that have begun - and been successful - in the U.S turn when they seek expansion. It's a strategy that often occurs in part because of growth that has saturated domestic markets and territories. Typically, larger more established franchise brands begin looking across borders for untapped markets and potential growth. It's an expansion strategy that's not new. But during the past couple of decades as franchising has continued to grow as a popular business model, the international growth strategy has been on the rise. International franchising can also provide opportunities for new and existing franchisees looking for expansion options. There are opportunities as near as Mexico and Canada and as far as the Middle East.

In one sense, international franchising can be a relatively smooth and easy process. After all, the franchise concept is built around infrastructure, simplicity, replication, and streamlined operations. What works in one place generally works in another. And many international markets are wide open and untapped and offer enormous potential for franchisors - with the right products, services, and business culture.

Consider this, eighty percent of the world's population lives in areas that are considered emerging markets. The U.S. Department of Commerce estimates that over 75 percent of the expected growth in the world's trade over the next two decades will come from developing countries, particularly big emerging markets, which account for over half the world's population, but only 25 percent of its gross domestic product.

Nevertheless, there are challenges for franchisors that seek expanding kingdoms in other lands - and often for the franchisees who operate the units. Franchisors look at key markers such as what kind of demand exists for their products and services in the new international market(s), the initial cost of entry, sourcing supplies and related vendor issues, and whether or not it makes sense to open company and franchise units in these new territories. Franchisors are going to evaluate a country's GDP per capita, general population statistics, and the overall health of the country's economy. Another significant factor affecting international expansion, laws often vary from country to country on small business operations and franchise licensing. It can be complicated and requires research.

Franchise representatives need to visit the countries they are considering moving into and devote time and resources to studying these cultures very carefully. One of the first questions to consider is time of entry. One school of thought says not to be the first to the market but a close second. This way another franchisor, essentially, invests in the market research for all competitors. If the product or service flies, and the market is proved to be viable and economically attractive, then other brands, and concepts, can begin to move in.

One of the most critical components of successful international franchise expansion is finding the right partners. This is a key ingredient to long-term success and profitability for the franchise brand. There's likely to be cultural barriers, political barriers, legal barriers, language barriers, and a hodge podge of other factors that differ from standard U.S. operations. That's why it's important to identify key people on the ground who know and understand all of these issues thoroughly. Typically, a master franchisee model is employed. The franchisor contracts with a person or entity to help identify and provide services to franchisees in a specified territory (anything from a whole country to a region to a city). The master franchisee typically pays the franchisor a significant initial fee for the rights to develop the territory and then retains a portion of the initial fees and royalty fees paid over time by the individual franchisees in the territory.

It's a great tool for a U.S.-based franchisor. The master franchisee is usually responsible for recruiting the individual franchisees and providing all training and support they need. That can include everything from basic training to all ongoing support. When correctly implemented, the master franchisee approach can result in more rapid system growth accompanied by less initial capital risk for the franchisor.

The qualified master franchisee can be the key to identifying and recruiting talented franchisees who fit the system and successfully execute the franchise concept.

Next time we'll look at two American franchisees who have successfully crossed borders and opened franchise locations overseas.

Published: November 10th, 2009

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