Off shore franchises

It was not all that long ago that ‘international franchising’ meant the spread of US systems around the world – but it now means much more than that.

Foreign franchise systems are now penetrating the American business scene, and not just from other developed economies. Latin American systems such as Pollo Campero from Guatemala and Churro Mania from Venezuela, have achieved success in the US, catering to the considerable Hispanic population. European and Australian systems are also making their mark, not just in the United States, but in other international markets; and an increasing stream of Asian concepts, often backed by large investment consortia, are moving into western markets.

In the process, the ownership of intellectual property in franchise systems is increasingly changing hands through mergers and acquisitions, blurring the concept of brand nationality. A number of flagship US franchises, for example, have been taken over by foreign organisations – Baskin-Robbins and Dunkin’ Donuts are now owned by British food and beverage group, Allied Domecq, and, more recently, the 7-Eleven convenience store chain was bought out by its Japanese franchisee. Along with this trend, we’re seeing the aggregation of brands under one franchisor and the increasing use of private equity financing to facilitate international expansion.

Globally, there are now around 15,000 franchise systems operating across more than 100 different business sectors. According to a recent World Franchise Council member survey, China leads the way with around 1900 of these systems, followed by the United States with 1500, Japan with 1100, Brazil with 900 and Canada with 850. There are approximately 4000 systems in Europe, with Germany, the United Kingdom, Italy and Spain accounting for more than half of these collectively. Australia, coming in ninth on the survey with 720 franchisors, remains the most franchised country in the world per head of population.

Whilst international expansion can open up huge potential markets and provide attractive growth opportunities, it is not something to be entered into lightly. Besides having to select and prioritise markets that offer prospects for your product or service, you also need to assess whether you can operate profitably in the prevailing business environment, taking account of the cultural differences, as well as the regulatory, legal and tax frameworks. Depending on the scale of your international expansion plans, a considerable investment of time, money and people is generally required.

For Australia, New Zealand will always be popular, especially as a first international market, but the big drawback is the small market size (less than four million people). In the United Kingdom, despite the number of Australian franchises already operating there, opportunities remain strong, especially in the areas of non-walk in retail, children’s education and health, B2B concepts and domestic and personal services. The franchising community is well developed and supported in the UK, market entry is relatively easy (no franchise legislation) and it’s the logical springboard into the rest of Europe. While taxation and labour laws will differ across jurisdictions, Europe on the whole is pro-franchising, with neither disclosure nor registration required under EU law. Some countries, such as Spain and France have franchise laws, while others are considering them.

North America, particularly the United States, is attractive to Australians because of the common language and the potential to access large, high disposable income markets. Franchising legislation is, however, quite complex in the US and differs from state to state, so that compliance can be onerous and costly (without a good franchise lawyer). A strong business proposition, however, should be the deciding factor – don’t let the issue of paperwork stand in the way of your potential success (that is manageable).

Another thing to remember is that America is not one homogeneous market, so don’t try to tackle it all at once. Depending on the type of system you have, it might be better to start off in a regional centre such as Denver or Atlanta (rather than Los Angeles or New York) to test and build your business model before branching out further. This approach has been adopted by a number of successful Australian concepts in the US such as Cartridge World, Bark Busters and Computer Trouble Shooters.

It is also advisable to explore alternative franchise structures to the master franchise arrangement (e.g. area development) due to the number of outlets required, in many cases, to break even. On the whole, however, Australian concepts are well received in the US and Americans are generally keen to try new products and services, but do the research and test the market before committing.

Canada is also a large and mature franchise market with strong cultural affinity with Australia. Franchise chains tend to be smaller here than in the US (59 outlets, on average, compared with 170 in the US), mainly due to Canada’s smaller population, the French-English cultural/language mix, and a tendency towards quite pronounced geographical regionalism (most franchises only operate in one or a few provinces – a national presence is not common). Over 80 percent of franchise systems are headquartered in Ontario/British Colombia/Quebec, but with wide diversification over 49 industry sub-sectors.

A third of all franchises are in retail food, followed by clothing and sporting goods. Photo, health and beauty, fitness, grocery chains, party supplies, educational tutoring and specialty goods are also common among franchise concepts in Canada. Although the country does not have federal legislation specifically dealing with franchise relationships, the provinces of Ontario and Alberta do have franchise-specific legislation relating to the provision of disclosure documentation.

There are also regulations in all 11 provinces regarding competition, price setting and other trade practices. Quebec also has a requirement for French as the primary language of business. A number of Australian franchise systems active in the US have also expanded to Canada, although it is also feasible to establish in Canada first and then move to the US once the business model has been tested and refined. Indeed, for businesses not quite ready to take on the tougher regulatory environment of the US, Canada might be the preferred North American entry point.

For those considering expanding off shore, access the information banks at the Franchise Council of Australia is a not for profit membership organisation that is the peak body representing the franchising sector in Australia.