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Dec, 10 2012


With global markets becoming a reality now, the franchise business model is gearing up to become globally relevant, going beyond the confines of local market boundaries in a world that is also witnessing the growth of e-commerce as a powerful distribution

FRANCHISORS recognise the rise of the international market as the world is getting smaller.

Franchising legislation in many countries is leading to better conduct in the franchising sector. This is leading to a trend towards going global with a franchise business model.

E-commerce is also emerging as a powerful distribution channel and many franchise networks are grappling with this new competitor. It is both complementing and competing with the physical networks. However, many franchisors do not have a coherent strategy and it is seen by many franchisees as a threat to their revenue. New strategies have been developed to address these issues and e-commerce will become embedded in the structure of any franchise system in the future.

With growth in the world economy, a motivated franchisee and master franchisee or area developer are becoming more and more valuable. The franchisee has emerged to bridge the gap between an employee's short term commitment to the success of his employer and the enterprising but limited resources, outlook and expertise of the independent businessman.

The 21st century will see the evolution of the franchise owner-operator as the most efficient last-mile-to-market business model yet developed. But the true worth of the franchise business model in some parts of the emerging franchise world is being muddled by the opportunist franchisor focused on selling franchises, rather than granting franchises to qualified operators and establishing profitable businesses. However, the trend of well run franchisors recruiting, screening and selecting better quality franchisees, master franchisees and area developers and those better quality franchisees gravitating towards well-managed franchises will drive the growth of substantial franchise networks on a global scale.

Franchising boosting retail, food & service sectors

Heavily populated emerging economies in India, Asia and South America are creating a substantial tech-savvy consumer class. A new generation of post-GFC businesses are emerging to service the new consumer. The retail, food and service businesses of the future are focussed on the needs of a changing consumer attitude to e-commerce and the alignment of the physical offer with an e-commerce strategy designed to capture more walk-in and log-in sales. These new-age businesses are reaping the benefit of this changing consumer and economic momentum and franchising is surfing this wave.

The emancipation of women and the single female is also driving female-centric consumption of health and beauty services and franchising coupled with e-commerce convenience will provide the personal touch.

There is no end in sight for the growing foodservice categories that are now starting to populate the business environment in emerging markets. Franchise food business will continue to offer more and more niche products and the services that go with them. The spectacular global growth of Subway, Gloria Jeans Coffees, Domino's and Boost Juice are just a few examples of focussed food service offerings that are attracting large numbers of consumers to these brands. Demand for services are not only focused on adults, but will also expand to the growing markets of child care, education and child development.  India is emerging as one of the largest markets for child development and education services in the world.

Trends driving franchise network growth

As competition intensifies in each market segment, the top players will seek to establish market dominance by acquisition of competitors and customers to push growth past that was provided by organic development. This trend has gained pace demonstrating that the blending of franchise and non-franchise networks will see franchising become a much more mainstream management and marketing tool.

There are three other emerging trends driving franchise network growth.

  • One trend is emerging from downstream suppliers seeking to secure distribution and the more attractive margins and brand value as a product or service gets closer to the consumer.
  • The second trend is the private equity and venture capital groups, who understand the value of branded networks. As more of this capital looks for a home, these groups will facilitate or participate in acquisitions and mergers of franchise networks, which will help to drive consolidation in the franchising marketplace.
  • The third trend is being driven by financial markets thirsty for new IPOs. The private equity and venture capital groups will look to create liquidity in the assets they have secured.

Competitive global franchise brands

The world will see more competition from foreign franchisors attracted by a target country's position near the top of the list of most desirable nations in which to grant a master franchise, as measured by a combination of the Graft Index, political stability, educated workforce and business transparency. A well-developed financial system and a legal system that protects intellectual property and upholds contractual obligations are also critical considerations.

As more and more of the thousands of franchise systems that currently operate in their local markets start to consolidate their businesses in their domestic market, they will reach a point at which they have already opened more locations in that market than they will in the future. From that point they face slowing growth unless they develop a new strategy to continue to leverage the know-how and expertise that they have created and refined. E-commerce will play an important part in that new horizon of growth.

International master franchising

The world is awash with capital and there are many groups or individuals with substantial net worth, who are searching for the next big idea in their country or region. Many franchise systems have pioneered internationalisation of their brand and demonstrated that master franchising can help a company grow on a global scale.

International franchising will become a bigger part of the revenue stream of more successful franchise systems with growth markets like China and India creating opportunities for global growth alongside the emerging opportunities in African and South American markets. Today, politicians in most countries understand the link between franchising and economic prosperity.

Future trends

Over the next five years, the franchise sector will grow at an annualised rate well exceeding inflation. There will be a massive increase in the number of franchise owner operators, many of them being multi-unit owners, regional or master franchisees. E-commerce will need to be a core part of brand and sales development to keep up with the demands of the new consumer.

Franchising legislation will lead to better conduct in the franchising sector; however, an emerging trend to overregulate will impact negatively on those countries which do not balance the need to protect the small business person with the flexibility of brand owners to control the customer experience. The globalisation of franchising has provided franchisors with the flexibility to simply avoid establishing in markets with punitive franchise legislation. Franchising is healthy and the prospects for continued global growth look good.

About the author

Rod Young is the Managing Director of DC Strategy. DC Strategy is a franchise specialist and the region's leading consulting and legal firm.

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