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Dec, 21 2009

Beware of potholes

McDonald’s recently closed down its operation in Iceland. One of the reasons behind it was its supply chain, which is also one of the crucial criteria to succeed in the Indian market. International business sounds good, but it is equally a challenging tas

McDonald’s recently closed down its operation in Iceland. One of the reasons behind it was its supply chain, which is also one of the crucial criteria to succeed in the Indian market. International business sounds good, but it is equally a challenging task.

When a person starts his business, he has both immediate and ultimate goal. Immediate goal can be to make profit and ultimate to grow his business. As soon as he starts getting success in his business, he starts dreaming of taking his business outside his geographical boundary and this is what gives rise to franchising business in foreign country.

Today with changing economic conditions, awareness of global markets, flexibility in trade’s terms and condition of other countries, saturation of existing companies in their domestic market, changing consumers’ taste, oligopoly of existing companies in market and improved transport and communication systems have given enough scope to businessmen to dream big.

“Although RE/MAX model has been successful even in the most unorganised real estate markets in the world, yet there are certain socio-economic factors which have an impact over its viability. We send a team of executives to the country we want to expand into, who spend some quality time in carefully understanding the real estate market in that country. They also shortlist the right candidates for franchisees,” says Sam Chopra, Director of RE/MAX, India.

Right product for market

How to decide on the right international market for the products or services? For this, the company is required to assess the market for its product’s suitability as well as to decide whether the product has to be adapted or to be molded to suit foreign market environment. “In my view, there are three non-negotiable which every company must have before they attempt to go into international market. They are domestic market strength, dedicated executive management resources and strong, proven cash flow and profitability in their domestic market,” says Rod Young, Executive Director, DC Strategy, Australia.

While making the strategy to enter the desired market, the company is required to study the market of that country properly. They should be aware of its competitors in that market. Apart from this, they should also be aware about the strategies of those competitors. As it is a universal fact that a domestic company has better knowledge and idea about the taste and requirements of its customers, it is always advisable to keep an eye on the working of those companies and know their succession chart. The company should have proper knowledge about its ups and downs in the recent past. “Local businesses have a huge competitive advantage as they have emerged in the local economy and are fully adapted to it. Most foreign enterprises have to learn the lessons the local businesses know already,” adds Young. Along with this, brand image should be created in the minds of customers.

“Brand image is very important at the time of launch. So, before foraying into foreign market, you have to create a brand image for the product and its company,” says Anupama Pathak of Gitanjali Group.

“McDonald’s was renowned for its hamburgers internationally. In India, the company faced the biggest challenge in catering to the local tastes and preferences, while maintaining its international USP of quality, service, cleanliness and value and sustain the image of a ‘Family Restaurant’,” says Amit Jatia, chairman of McDonald's in western and southern of India.

Master the art of selecting master franchisee

Selecting a master franchisee is important to make your presence felt in a foreign country. While selecting the master franchisee, you should have a careful look at the franchisee’s track record.

“We have selected SunCity as our franchisee in Bahrain because they are already running the franchise of McDdonald’s and Gloria Jeans and have a very good track record,” says Rajeev Matta of The Yellow Chilli, an Indian company that has signed a franchised agreement with Suncity, Bahrain-based company.

California Pizza Kitchen, a Los Angeles-based chain has signed a franchise agreement with JSM Corporation Pvt Ltd and Daud Arabian Trading. JSM is a Mumbai-based group that franchises the Hard Rock Café across India and Daud Arabian is a unit of Oman’s Daud Group, which has opened restaurants under US brand name such as McDonald’s in the Middle East. Once the company has chosen the master franchisee for its company, 50 per cent of its business target has been achieved.

But, that does not imply to its complete success. The company can not depend fully on its MF to take its business positively to a new market. Even a small fault from MF’s end can bring big loss to the company. Thought and expectations of a franchisor from its MF might not meet the reality. “Many franchisors take Master Franchisees with the expectations that they will know how to develop their home markets. But, in majority of cases history has shown them to be wrong. This is often exacerbated by ignoring the three non-negotiable that I told before,” Young says. Over 80 per cent of international franchisors are not making money from the on-going operations of their MFs.

Krispy Kreme, an international retailer of premium quality of sweet treats, including its signature original glazed doughnut, has signed a franchised agreement with KDN Company for developing 20 franchised outlets pan Thailand over the next five years. “With KDN Company Limited, we have found a franchisor partner in Thailand with a true passion for the Krispy Kreme brand and our world famous products,” said Jeff Welch, Krispy Kreme president, international recently in a press release.

"We believe that their unique and sound understanding of the Thai consumer, combined with their years of successful business experience across a variety of consumer industries, is a strong asset that they possess to establish Krispy Kreme brand in Thailand."

Develop USP

As soon as you have entered the foreign country, you should develop a USP for your products and services, which your competitors cannot not imitate. A franchisor should try to find some gap in the present market and design his strategies and bring in products accordingly.

Myriad woes

Whatever preparation a franchisor does before entering a foreign market, he faces different problems in different countries. The main challenge that RE/MAX faces while expanding in new regions, especially in the developing countries, is that most of the markets are highly unstructured and fragmented. “Lack of regulatory and professionalism is another aspect which makes RE/MAX look like a very idealistic concept in these countries. Yet RE/MAX has successfully prevailed over these challenges simply because it creates a lot of value for everyone, whether it is the broker, franchisee, consumer or the developer, everybody wins with RE/MAX,” says Chopra.

Existing firms pose tough call

The company is likely to face competition from the existing firms, who have a better idea about the customers from that market. In such situation, it becomes difficult for the franchisor from any foreign company to cope up with the existing firms. Like, in the beginning, S.Kumars and Raymonds had so strong presence in the Indian market that it became difficult for international brands to make their place. But at this point of time, you can find many international companies who are competing successfully with Indian companies in the Indian market. Reason behind their success could be the increasing living standards and changing tastes of customers. Today, the market is driven by competition with the belief in survival of the fittest.

“In most western economies often over 90 per cent of franchisors are locally developed companies. In emerging economies like India, where franchising is relatively new in global terms, over 60 per cent of all franchise systems are of Indian origin and with the rate of growth of the organized sector of the Indian economy, I expect this will exceed 90 per cent within 10 years,” says Young.

To overcome this competitive disadvantage it is prudent to do consumer research and a competitor analysis. For example, things in western markets that are taken for granted such as the integrity of a cool chain distribution capability for a foodservice network are often sub-standard in emerging economies and this can have a severely detrimental effect on the quality of the product and growth of the network, explains Young.

Taste culture, profits

To meet the tastes of foreign people is another challenging task, which a franchisor has to fulfil. Depending on the segment of product and commodity you belong to, tastes of people may vary. If you are competing in Food and Beverages segment, you have to renovate your menu according to their tongue. Whether it is McDonald’s or Pizza Hut, we can find Indianised dishes in their menu list.

With respect to the cultural and traditional sentiments, McDonald’s does not serve its most popular product, the BIGMAC (a beef burger) in India. “We have also developed an egg-less mayonnaise for the first time in the worldwide system. Additionally, to suit the Indian palette, the McAloo Tikki burger, Veg Pizza McPuff and Chicken McGrill burger were among other offerings that were formulated and introduced using spices favoured by Indians. Furthermore, each restaurant kitchen was designed to maintain separate vegetarian and non-vegetarian food counters,” says Jatia.

Hold on to the ground

A company might fail in its operation even after immense research and business strategies. Every company finds it easy to do business in its own country, as they have their roots in that country. Unlike foreign country, it knows the ways of business there and more importantly knows the culture of its own nation.

“It is poor planning, a lack of respect and understanding of the competitive environment and a ‘sales’ rather than development mentality have lead to many failures, believes Young.

Recently, McDonald’s, with more than 31,000 local restaurants serving more than 58 million people in 118 countries each day, has closed down its all franchised outlets from Iceland. Since the bank crisis last year in Iceland, the value of Krona has fallen nearly 100 per cent to the US Dollar. This has shaken the Iceland’s economy. As a result, McDonald’s has to make an exit.

Although we can find flexibility in rules and regulation of an economy, there are certain legal vistas, which are to be considered before entering a foreign market. “Different countries have a different law. When we bring the company from outside to India, we also face different challenges in it. As far as legal constraint in franchise agreement is concerned, that can be solved mutually,” says Pathak.

Other legal aspects like Penal Code should not be overlooked. Neither it is in the hand of a franchisor nor franchisee. Its ignorance could be worse.

When KFC opened its first outlet at Bangalore in India, it was having further expansion plans pan India. It had selected Bangalore as its first destination to fit its feet in the Indian market because majority of the people in this city catered to upper middle class population, who liked to dine out at weekends. However, unwillingly, KFC got caught in a legal trap. The regulatory authorities raised objection to KFC’s ingredients. It did not adhere to the Prevention of Food Adulteration Act, 1954. KFC has raised the levels of the flavour enhancer monosodium glutamate (MSG) in its food items. KFC was also under the lens of People for Ethical Treatment of Animals (PETA). As a result, KFC had to close down its first and all outlets from India. Then with the change in its menu card and a renovation in its menu, KFC re-forayed into India in 2003.

“RE/MAX doesn’t make a complete exit from any market. In the worst case, the franchisee may change hands,” says Chopra.

Apart from this, there can be many other reasons for the failure of research. One of the reasons for the closure of McDonald’s in Iceland was the high cost. McDonald’s used to import its products from Germany, which almost double the cost of its production. This implies that even the supply chain can affect the working of an outlet in a foreign country. Ironically, one of the key reasons for McDonald’s success in India is its supply chain. McDonald’s invested Rs 1,000 crore in its backend integration and supply chain to offer its customer the best quality products at affordable price. At McDonald's, costs are kept low by increasing efficiency and cutting wastage at all levels which helps achieving margins.

“McDonald's unique cold chain, on which we have spent more than six years for setting up in India, has brought about a veritable revolution, benefiting the farmers at one end and enabling customers at retail counters get the highest quality food products, absolutely fresh and at great value,” says Jatia.

“Import duties in protected economies can also prevent the economic model of the business working in a foreign market and the sourcing of a local supplier may be challenging as the manufacturing quality and/or capability may not be developed in the new market so cost of landing goods makes the business non-viable,” comments Young.

“Companies like Cartridge World, Pack & Send and Boost Juice have had their own unique problems related to supply of the products they sell,” adds Young. Boost Juice uses special yoghurt developed in Australia, which is often not available in a new foreign market. For this, the MF may need to import and store the ingredients to meet the Boost Juice standard.

“Cartridge World is a printing cartridge recycler but also sells refilled cartridges. In some markets empty cartridges are not recycled so that part of their business model needs to be modified,” adds Young.

Innovation & renovation

Constant innovation and renovation is required to keep your leg tight inside the market. Customers soon get bore of the similar type of supply or taste. They want change and this is where you can find gap in a new market to make your place. Along with it, this is where if you miss, you miss your hold from the existing market.

“At McDonald’s, it has always been a constant endeavor to work towards innovating and upgrading product offerings to appeal to the local appetite,” says Jatia.

In 2008, the company introduced wholesome multi-cereal bread and a salad mix to make the new wraps lighter choices for McDonald’s customers. “In early 2009, we introduced the New Chatpata McAloo Tikki Burger and Shake Shake Fries, which offered a new experience and a more localised flavour to customers. Recently, McDonald’s introduced the globally renowned and appreciated Chicken McNuggets,” he added.

Product innovation is an ongoing process at McDonald’s and you can see something innovative happening on that front regularly.

There are various elements like political, social, economic, and cultural changes which are required to be researched properly before making entry to a foreign country. Apart from these, the company should also be aware of the temperament of its new customers to succeed in its growth plans.

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