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Dec, 07 2010

Building firm franchise ground, brick by brick

As per Goldman Sachs, the BRIC nations are expected to bring another 200 million people with incomes above $15,000 into world economy by 2025, which is equivalent to the combined population of Germany, France and the United Kingdom. They are emerging as i

BRIC nations comprising Brazil, Russia, India and China are undergoing tremendous growth and have transformed themselves into great opportunity markets for long-term business and investment success. According to industry reports, Brazilian franchising has increased beyond double digits in recent years, with rates significantly higher than the national GDP. In 2009, the sector`s turnover was Rs 63 billion (US$ 35 billion), representing a growth of 14.7 per cent compared to 2008. China currently has 1,900 franchise systems with 82,000 outlets, growing 49 per cent annually. The Indian franchising industry's market size, currently estimated at US$ 7.2 billion, is expected to touch US$ 20 billion by 2013. Despite the fact that Russian franchising has been rapidly developing, there's still space for new players.

Franchising a powerful catalyst

Franchising has been a powerful medium in the growth of their respective economies. According to Mark Abell, Partner, Field Fisher Waterhouse LLP, United Kingdom, “Franchising can be a powerful international commercial catalyst for businesses of all sizes. The strong economies of all the BRIC countries present real opportunities for businesses that use franchising as part of their commercial strategy.” With franchising getting rapidly evolved as a business trend across BRIC nations, the revenue quotient as well as investment ratios are escalating in these markets, for both domestic as well as international brands.

Defining the potential of Brazil as a prospective market option, Paulo C. Mauro, President, Global Franchise Net, Brazil, says, “In 2010, the franchise industry's turnover will be around U$ 40 billion with almost 2,000 franchisors and 90,000 franchise units, which brings Brazil to the fifth biggest world markets club.” Sectors like fast food, education, fashion, health food and beauty are the most preferred ones for investment for franchise brands. Explaining the business prospects in the franchise market of the BRIC nations, Abell explains, “Perhaps some businesses are better suited than others. Big ticket infrastructure franchises such as hotels are well suited to all these countries. However, low-value job franchises such as contract cleaning are not well suited, as there is a surplus of manual labour in these markets and so the opportunity to make a reasonable margin is questionable.”

Echoing similar views, Karl J. Kosner, Managing Partner, The Kosnar Group, US, believes that franchising in the hospitality industry in India is an attractive proposition. “I feel that most franchise companies having success in India initially will be large travel, hospitality and retail businesses. Again, I draw on hotel statistics to validate my position. The total Asia Pacific hospitality pipeline comprises 1,065 hotels totaling about 2,60,000 guestrooms, according to the September 2010 STR Global Construction Pipeline Report.” However, he feels that the Asia Pacific hotel pipeline is dominated by development activity across China and India, which makes up more than two-thirds of the total pipeline, while quoting Elizabeth Randall, Managing Director of STR Global. He adds, “The other important factor is that most international hospitality companies are financially able to cope with the substantial legal and other fees required to do business in China.”

Highlighting the franchise options in Russia, Abell states, “The Russian market is hungry for aspirational brands. However, the main focus of most franchisors and their developers tends to be not the whole of the country but west of the Caucuse, particularly, Moscow and St Petersburg.” Pointing out the advantages for investing in the franchise market of China, he states, “China is a vibrant market with a fast growing sophisticated middle class that has a real appetite for foreign goods and services. It is an excellent target market for most foreign franchisors. Although the country has many different races and cultures, they all tend to have a very homogenous and materialistic approach to the market. The religious and dietary differences found in India are more or less absent in China.”

Pedro Ruiz, CEO, Vivafit, says they want to focus on expanding the brand in BRIC countries, whose high growth in the coming years guarantees a firm position.

India on steady slope?

According to experts, the current annual turnover through franchising in India is estimated approximately to be $7.2 billion, which is likely to escalate to $20 billion, approximately by 2013. India has been the growth ground for numerous domestic as well as international franchises expanding rapidly across food and beverage, education, apparel, wellness and hospitality. States Kosnar, “My view of international franchising potential in India is more optimistic than in China. The main reasons are a far more open society based on a democratic form of government, commercial property laws that respect intellectual property rights (far more than China) that allow for creating greater recognition of brand value.”

However, several global experts feel that India can be the ideal destination in respect to franchise investments, if some aspects are taken into account. Explains Abell, “India has many local traits that can build barriers for some franchisors. For example, many dietary restrictions that people observe, such as being vegetarian, which means that foreign F&B businesses have to invest heavily in restructuring their menu, if it is to have mass appeal.”

Mauro states, “India is developing very fast. I have no doubt that it will be between the five biggest world markets in the next 10 or 20 years. But it is not easy to introduce an international franchise in India. Besides the cultural and religious barriers, the country has problem to offer sites and many other barriers.”

Risks redefined

While the BRIC nations are opening up avenues for brands to invest and reap rich dividends, experts have pointed towards several shortcomings. Says Kosnar, “Doing business in a foreign country and encountering an unfamiliar business culture can be a complex and strenuous activity. The age-old conflict between young people in Russia who, influenced by Western culture struggle for changes, and the older people who cherish past memories and want to maintain traditional Russian values makes it very difficult to understand the commercial market diversities. Therefore, unless a franchise company has enormous financial resources to stay up the course regardless of any obstacles, I would take a wait-and-see approach to franchise expansion in Russia.”

He adds that the reason why many international companies continue to hesitate to franchise in China is because of the concerns about the legal system and the difficulty in protecting their trademarks and intellectual properties. Mauro feels that the Brazil franchise industry has no shortcomings as of now. He forecasts two-digit growth in the next 10 years, warning that in the future, the country will develop problems regarding labour force and sites.

What's ahead?

While potentialities and drawbacks are part of the same coin, the BRIC nations are being anticipated as reigning franchise forces in the near future. This can be ascertained from the fact that real economic growth from 1999 to 2008 averaged 9.75 per cent in China, 7 per cent in both India and Russia and 3.3 per cent in Brazil. Clearly, the BRIC nations are poised to be potential franchise markets.

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