Franchising is, at its’ very basic definition, the practice of selling the right to use a firm or company’s successful business model. We have all seen the local Subways, Starbucks and 7-Elevens in our neighborhoods and other states while traveling, but what about abroad? International franchising .....
Franchising within the United States has played an important role within the nation’s economy. Today within the U.S., there are nearly one million franchised establishments in operation. These franchises provide more than eleven million jobs and contribute $278.6 billion in payroll, according to the International Franchise Association. Since franchising is so successful within the U.S., that can only mean there are numerous growth opportunities for U.S. franchises within international markets.
There are many reasons why a franchise business may consider international expansion, but a few of the most notable aims include the home market is saturated, a desire to increase sales, and filling a void where a product or service could be utilized. However, before taking the leap into an overseas market, a franchised business needs to determine if they are truly ready for expansion. Some of the most important factors to consider when making a decision are listed below:
- The timing
- The size of potential markets
- The per capita GDP in target markets
- The legal maturity of target markets
- The compatibility of the concept with target market culture
- The viability of other more mature franchise systems in the target market
- The direct competition in the target market
- The potential language and cultural barriers and
- The physical accessibility of the target market to current operations (Franchise Direct, 2014).
Once a franchise has decided to seek international expansion they must decide how to execute their new expansion plan. The first and most common form of international expansion is master franchising. This option, “offers individuals and corporations the opportunity to purchase the rights to offer franchises for the franchisor within a certain territory. This form of franchising enables rapid growth and minimal capital requirements for the franchisor” (Franchise Direct, 2014).The second option is development agreements where a developer is granted the right to develop and operate a certain number of outlets within a given territory or designated area. However, they do not have the authority to sub-franchise the outlets to third party franchisees.
“Area development programs provide all the general advantages of multiple-unit franchising, such as potential for accelerated growth with less investment or capital demands upon the franchisor. In addition, area development programs may lead to additional cost savings for the franchisor due to the fact that area developers typically have prior experience with the system. A development agreement ultimately offers the franchisor more direct control over the franchise and the overall development of the territory” (Fitzgerald and Schott, 2008).
The last option for international expansion lies in wholly-owned subsidiary. In this option, the subsidiary is entirely separate from the foreign parent company and therefore the parent company is removed from any liability. As international franchising continues to increase, franchisors may be wondering which countries are the most popular markets.
“A recent World Bank study found a correlation between the growth rate of a country’s gross domestic product (GDP) and new investment in new businesses. For example, countries with GDP growth rates between 2 and 4 percent are good markets to seek international franchisees in 2014” (Franchising, 2014). The list below illustrates the top twelve markets, plus GDP growth rates, as projected for 2014.
- China 7.3%
- Philippines 6.6%
- India 6.1%
- Vietnam 5.5%
- Indonesia 5.4%
- Saudi Arabia 5.1%
- Chile 4.9%
- Turkey 4.6%
- Columbia 4.3%
- Mexico 3.9%
- South Africa 3.3%
- New Zealand 3.3%
China remains one of the most popular countries for international expansion as it is considered the greatest growth potential for U.S. companies. As reported by Franchising, “As China transitions from a government-owned enterprise economy to a consumer-spending economy, more and more consumers have discretionary income to spend at U.S. brands; and average wage increases of 20 percent a year are good for sales at U.S. brands.”
The most popular U.S. brands to expand internationally include food and beverage brands, educational franchises (especially for children), retail brands and services franchises. As most countries begin to see an increased population of individuals 60 years or older, home care franchises will soon be desired in most areas of the world. This year, U.S. franchises can expect to see just as much growth as previous years, if not more.