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Sep, 07 2011

TASTING SUCCESS BEYOND BOUNDARIES

International franchising is the most effective growth scheme for a franchisor aspiring to be a global brand. Several franchise formats, including master franchise and development agreements are available to make this happen. It's interesting to see when

FRANCHISORS usually grant master franchisee or developer rights to an individual or an organistion in those territories that are potentially risky for them. By this, they can leverage upon the local know-how, funds, management and other resources of the franchise partners to launch their franchise systems in the new territory. The two franchise arrangements are conceptually more or less same except for some distinctions. A master franchisee or a sub franchisor has the rights for an entire territory. He may own and operate a franchise or choose to sub franchise i.e. sell franchises and perpetually takes the role of the franchisor in his assigned territory. On the other hand, the master developer owns all of the franchisees in the acquired territory entirely. Both share considerable responsibility of brand building in the new market along with the franchisor and are liable for over all success of the franchise system. For some master licensees, the next level of business development implies foraying into new international markets. The article takes a snap short at the key dynamics that impact the master franchisees and developers operating in multiple countries.

Motivating facts

Several factors can motivate a master franchisee or a developer to take up various foreign markets. The company may want to tap other dynamic and emerging markets to boost its profits and grow further. Dubai-based Synergy Holdings Ltd is the master franchisee of a Korean food brand ‘Yogurberry’ for United Arab Emirates (UAE), Bahrain, Oman and Qatar. Elaborating on what motivated the company to secure rights for several countries, Abdul Kader Kara, Managing Director of the company, says: “There are several reasons why we chose to take the master franchise rights for ‘Yogurberry’ for various international territories. We strongly believe in the brand, its offerings, values and consumer satisfaction. Being based in the UAE and having the advantage of being centrally located, continuous support to area franchisee (AF) and unit franchisee (UF) is manageable.” For some franchisees, international expansion into the bordering countries can be observed as a natural progression of their ventures. Dubai-based Gourmet Gulf Company (GGC) LLC has development and franchise rights of the US food brand California Pizza Kitchen (CPK) throughout the Middle East markets in countries namely UAE, Kuwait, Oman, KSA, Bahrain, Qatar and Jordan. Also, the company has rights for other brands like YO! Sushi, Morelli's and GBK. Sami K. Daud, Chief Executive Officer, Gourmet Gulf Company LLC, shares the company's franchise portfolio: “We have four franchises for the Middle East region that we acquired in the past eight years. We acquired YO! Sushi (2003), both Morelli's & GBK (2005) and CPK (2008). The challenges of expanding into a new country are many, but with experience in several countries, Gourmet Gulf is in a position to repeat success in a short span of time.” The other rationale for such expansion can be factors like oversupply of franchise units in the home market, achieving business scalability, increasing sales and revenues etc.

Chasing the challenges

It's important to understand that every market is unique. Operating through various countries poses a challenge for preservation of standards in terms of training, operations, support, quality etc for all the locations in the allotted international territories. Therefore, critical factors such as the market size and its per capita gross domestic product (GDP), the required capital and other resources, legalities should be clear before hand. Other factors include- geographical distances between the base of a master franchisee or a developer and the aimed territory, the issue of express competition, apparent cultural and language barriers etc. The businesses contemplating franchise operations in multiple countries should ensure that they understand the commercial environment and the market gap for their products and services. Adequate capital and resources are pertinent for managing across borders.

Probable risks

While handling several international locations, a master franchisee may be exposed to a number of risks and uncertainties. Moreover, in case of legal or regulatory stand offs, the rules of foreign land may not favour a master franchisee in the event of disputes, legal proceedings, taxation, claims and other such assessment by foreign authorities. As Kara confirms: “We ensure that laws of each country are respected and followed. We clearly stipulate in our contracts that the area franchisee (AF) must adhere to the requirements set out by the respective authorities in each territory. Taxation varies in each country and that needs to be taken into account.” Moreover, factors such as inability to withstand competition, incapacity to use and mange its resources (funds, infrastructure or people etc) and failure to execute the business plan effectually can lead to the collapse of the franchise system.

Potential rewards

A business can attain fast track growth and consolidation by breaking into new international markets. Some markets are more favourable commercially due to their conducive economic, political or regulatory settings. When a franchisor signs a franchise partner for various countries, it reflects mutual faith, understanding and confidence in the brand. The arrangement allows a franchisee to have control over a large territory and also diversify the risk over varied geographies. Diverse parameters show general profitability and performance of all international locations. As Daud says: “For our businesses, profitability will be viewed through a series of key performance indicators such as sales levels, net profitability and return on capital employed.” Also, apart from enhanced earnings, the franchise associate can take pride in growing the brand internationally.

New frontiers

Backed by strong financials, a good team and passion, a master franchisee can continue achieving new frontiers of success. After successful forays in several countries, Synergy Holdings and GGC are planning to extend their footprint further on the global map via master franchising. Kara says: “Yes, we plan to expand into Europe and Africa in the coming few years. We are also in talks with a couple of other F&B brands to venture further into India and other markets. In India, GGC has entered into a joint venture with Mumbai-based JSM Corporation. The new entity JSMGCC India Pvt. Ltd has acquired the development rights for India. GGCJSM may also opt for development rights for multiple countries in future. Daud says: “JSMGGC will consider securing master franchisee rights for a new brand for India and other countries, depending upon the size of the opportunity.”

Cautious move

The rationale and timing should be right for launching operations in several countries across the globe. Securing a master franchisee deals in a phased manner may be more apt strategy for international expansion and sustainable growth. As Daud comments: “We found the strategy to be suitable for us, since every time we bought on a new brand we were able to give it the focus in order to understand the dynamics of a brand and thus gave us a clear idea of how to run it successfully. When taking many brands at one time, it becomes easy to lose focus and this can be detrimental to your business.” On the similar lines, Kara affirms: “We phased out the process into two phases. In the first phase we forayed into countries like Bahrain, Oman and Qatar in the Middle East and later in India. We believe this is the right approach. The reason was to ensure that we understood each territory well. Each territory carries different trends and requirements.” Moreover, a solid and well-executed business plan is critical to achieve the targeted international expansion. An efficient plan will cover aspects such as proficient allocation of resources, developmental costs of a robust global system, sales and marketing and human resource planning, operational and management systems etc. Therefore, it's important that a master franchisee or a developer is prepared enough to take the plunge to expand internationally.

Bottom line

While risks are inherent to international expansion, the process can be potentially rewarding when an investor can gauge the opportunity that comes with it. When a master franchisee decides to expand internationally, it offers an opportunity to become a global player. While operating through various countries is challenging, it also opens new frontiers of success for a master franchisee or a developer and they, along with a franchisor, can jointly obtain the success beyond international boundaries.

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