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MSMEs 2018-04-30

Franchising & The Phenomenal Global Opportunity For MSMEs

A study into the franchising model deployed by MSMEs around the world can shed some light towards the potentiality of this business development method for enterprises that are inspired to go global.

By Nguyễn Phi VânChairwoman

The franchising industry is a quiet achiever. For many years there have been no headlines about the industry and its amazing contribution to national economies. Fortunately, this has changed dramatically in recent years as governments have started to wake up and smell the roses. If an industry can contribute up to 10% of the national GDP, it is definitely NOT an industry to be missed. With enough attention paid, franchising can be a strategic platform for governments to support the growth of MSMEs, in most markets accounting for more than 90% of established enterprises.

Gone are the days when enterprises focused simply on exporting raw material or products. In the knowledge economy, value lies in such intangible assets as brands, business models, business management systems and the transfer of technology and know-how. The bad news is that it takes a paradigm shift in mindset, strategic approach and focus for MSMEs to understand, commit and persist on the road to building value. Franchising, at the end of the day, is a business development method. It is not a silver bullet and as much as we all hope, it does not happen overnight. Foundations need to be built. Resources need to be mobilized. And business models need to be proven. A few governments around the world have identified franchising as a major economic contributor, and have established support policies and programs to help MSMEs build their brands and models and export their brand systems globally. For those that have not been supported, however, franchising is still the shortest and easiest way for MSMEs to go global. Perhaps a study into the franchising model deployed by MSMEs around the world can shed some light towards the potentiality of this business development method for enterprises that are inspired to go global.

The US – Franchise Is A Leader In Job Creation

As the global industry’s cradle, the United States is the only country that monitors, measures and publicly reports the impact of franchising on the local economy on an annual basis. This report has been undertaken by the International Franchise Association (IFA) Education and Research Foundation and can be downloaded from the IFA’s website.

According to the 2016 report titled " The Economic Impact of Franchised Businesses", there were 801,000 establishments in the United States, counting both those owned by franchise partners and franchisors, and including business format and product distribution franchises. Franchised businesses directly provided nearly 9.0 million jobs, produced $868 billion of output, and added over $541 billion to the gross domestic product (GDP).

Modern franchising emerged from the United States. Because America is the world’s most mature franchise market, use of the franchise model internationally is a competitive advantage for United States exports. Initially, international expansion was reserved for the large franchisors in each market segment. International franchising has now become a priority for small and mid-sized franchise companies across many different industries. According to Franchise Times data, 38 percent of the units of the 200 largest United States based franchisors are already outside the United States. Over the three-year period from 2012 to 2015, these companies have collectively added four international units for each unit they opened domestically.

Canada – Franchise As A Significant GDP Contributor

According to the Canadian Franchise Association, Canada’s franchising sector comprises more than 1,000 franchises and more than 78,000 individual units. This sector accounts for 10% of Canada’s GDP, which is surprisingly a significant contributor to the national economy. In the retail sales sector, 45% of all sales are from franchise operations. The Canadian franchise industry generates approximately US$68 billion each year, creates over 1 million jobs, which makes 1 out of every 14 Canadian being directly or indirectly employed by the franchise industry.

Australia – Highest Franchised Outlets Per Capita In The World

Franchising is well-established in Australia with more franchising outlets per capita than any country in the world and three times more franchised outlets per capita than the United States. The sector is considered mature, contributing 9% of Australia’s GDP.

There are 1,100 business format franchise systems currently operating in Australia. A total of 92% of franchise systems are home-grown. On average, Australian franchises have been operating for 21 years and franchising for 13 years.

New Zealand – Strength In National Franchise Brands

There is an estimated 631 franchise brands operating in New Zealand in 2017, compared to 446 in 2012. This figure includes several systems that offer multiple concepts under a single brand name and therefore counted once only. Growth in the number of franchise systems is not surprising given the strong economy. Of total franchise systems, 72 per cent originated in New Zealand.

In 2017 there are an estimated 35,000 business format franchised units and 2,000 company-owned units, producing a total of 37,000 units operating in business format franchises in NZ. Estimated turnover for business format franchising was $27.6 billion representing a growth of approximately $12.6 billion in five years. Together with estimated motor vehicle sales of $11.1 billion and seasonally adjusted fuel retail of $7.4 billion the total sales turnover for the entire franchising sector was estimated to be $46.1 billion (compared with approximately $30.8 billion in 2012).

Malaysia – Franchising Is One Of The Key Sectors For Economic Growth

Malaysia has Asia and probably the world’s most franchise friendly government. Malaysia views franchising as an important economic driver and as such it offers various sweeteners to encourage the expansion of the industry.

The Malaysian government actually has their own franchise development department which created the National Franchise Development Master Plan (PIPFN) 2012-2016. The plan sets out challenging goals and strategies:

  • To contribute 4.3% of GDP by 2016.
  • To contribute 9.4% of GDP by 2020.
  • To have a 16% increase in the number of registered franchise companies by 2016.
  • To make Malaysia the franchising hub in South East Asia.

The Perbadanan Nasional Berhad (PNS) is an agency owned by the Ministry of Finance Incorporated (MOF Inc.) with the mandate to lead the development of Malaysia’s franchise industry. Several great finance schemes and tax incentives are available to help existing businesses grow through franchising and to attract new franchises into the country.

For example, the Franchise Micro-Financing Scheme allows prospective entrepreneurs with lower incomes, the opportunity to start businesses with mitigated risk. The PNS allocated RM8 million (approximately US$2.5 million) to the program and as of early April 2013, RM6 million (approximately US$1.9 million) was delivered. The Ministry has stated that it is not averse to pumping more funds into the scheme.

Another scheme, The Franchise Development Assistance Fundencourages local businessmen to expand their existing business into a franchised business. Businesses that have already successfully developed as franchises,are eligible for reimbursements of up to 90% for the overall franchise system development costs incurred, for a maximum amount of approximately US$31,118.

In addition, low interest loans of up to 80% are available to new franchises with no guarantor or collateral required. Of particular interest to overseas companies looking to enter Malaysia, is the availability of assistance for master franchisees.

South Africa – Franchise As Growth Platform For MSMEs

Franchising has become more popular in recent years, as it is perceived to be aneffective way to conduct and grow successful businesses across a range of industries. Franchising also plays an important role in furthering the development of small and
medium businesses. Job creation, poverty alleviation, economic growth and black empowerment rank high on the South African government’s agenda, and thereappears to be a growing recognition by the South African government (SAG) that
franchising can be an effective business model to address these needs.

There are over 550 franchised systems and over 30,000 franchised outlets in South Africa today. Franchising contributes approximately 9.7 percent of South Africa’s GDP and is an important job-creator and driver in the country’s economy, in addition to having one of the highest business success rates. Almost 90 percent of franchises are locally developed, and around 12 percent of master licenses are international.

There are a lot more case studies from various countries around the world on the impact of franchising to national economies, specifically with the contribution of MSMEs to the growth of domestic brands and business models. It is time that MSMEs and governments around the world to start considering franchising as one of the most efficient ways to take their brands, their enterprises and their impact worldwide.

This article is authored by Nguyễn Phi Vân, Chairwoman, Retail & Franchiise India.

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