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Oct, 06 2014

Africa opens gateways of growth

Quick international foray is every brand’s dream that too at the most ideal location. These days most Indian franchisors prefer a foray into African markets.

Including the promising market, many other reasons can be attributed to this move. Let us find out what's taking the top franchising brands to Africa.

According to research commissioned by the Franchising Association of South Africa- The franchising model holds enormous promise for job creation and economic growth in South Africa as franchisees are largely successful, having as a sector generated R302bn and employed 300,000 people in 2012. The survey also found that almost half of all franchisors have been in operation for more than 12 years. Another strong indication of the sector's growth is that it added about 3700 new franchise units in the 2012 financial year, bringing the total number of franchise stores in South Africa to more than 30 000. Although franchising is active in about 17 business categories in South Africa, the survey found that the sector, once dominated almost exclusively by fast foods and restaurants, is becoming more diverse. So, when we talk of Africa, there is no doubt of the fact that South Africa holds the torch for franchising in Africa. Let’s see which category offers most lucrative returns for Indian franchisors. Besides the great prospects that the continent offers, there are many other reasons for Africa being the top choice for Indian franchisors. Franchising has experienced phenomenal growth around the world and Africa is no exception. The saturation of western markets, the relaxation of trade barriers and the globalisation of business have pushed franchisors to new African markets to distribute their products and services.

Franchising in Africa 2014- Legal and Business Considerations, published by the LexNoir Foundation and written by Kendal H. Tyre, Jr. and Diana Vilmenay explains much about the franchising trends in Africa. Kendal has mentioned in his book that by 2030, much of Africa will attain lower-middle to middle class majorities and consumer spending will expand from US$680 billion in 2008 to US$2.2 trillion. According to McKinsey & Company, Africa currently has more middle class consumers than India, which has a larger population.” About the SME's in Africa Kendal mentions: “African Development Bank research related to business failures has revealed that only 15 per cent of franchise small and medium business enterprises  folded compared to an 80 per cent failure rate among independent businesses. This data point shows the significant impact that franchising could have on the growth and stability of new business ventures on the continent. Currently, SMEs account for more than 90 per cent of private business in Africa. The franchising framework can be viewed as an effective tool to promote SME and private sector development, contribute to poverty reduction and wealth creation, and even promote quality health care. The potential opportunities under the franchising model are not only with international franchisors expanding into African markets but also domestic African SMEs adopting the franchise framework. Existing indigenous businesses in target countries have knowledge of the specific, local market demands. They have a proven product to be offered to consumers and a proven business format to offer to future franchisees. In fact, indigenous franchising should prove more attractive to local consumers and be less sensitive to the need for product testing and adaptation in African markets, which may result in shorter gestation periods and lower failures rates for such franchises

Taking roots to African land

Firstly, if we talk of African brands success in India, one brilliant example is Nando's. Nando's is a South African casual dining restaurant group that has outlets worldwide. By 2020, Africa's consumer spending will amount to $1.4 trillion and 128 million households on the continent will have discretionary income, according to McKinsey. Leading men's wear brand, Classic Polo already has its outlets in Dubai and Singapore and soon plans to foray into African market. Ferns N Petals opened its first overseas unit in Kathmandu and is now eyeing African land. Anil Sharma, Vice President, Retail, Ferns N Petals said: “Who wouldn't want international exposure and as a brand if we can share emotions via flowers, why not make a bridge between Africa to India and vice a versa. Why not share our expertise with them and they can teach us something from their market. It can be a great move.” Yum! Brands that operate Pizza Hut, Taco Bell and KFC globally have also included South Africa into its top 25 markets- stores for the year end 2013. Till then the brand had 736 KFC in Africa.

Challenges

Franchising in Africa is not without its challenges. A basic understanding of any franchise arrangement is that the intellectual property of the franchisor is licensed to franchisees for a limited time and under certain terms and conditions. Kendal opines: “To protect its intellectual property, the franchisor reserves sweeping rights in its franchise agreements with its franchisees. The “rule of law” is critical to maintaining and protecting property. Without the franchisor's ownership of its intellectual property, the franchisor would have no interest in teaching a potential competitor its proven trade secrets. Concerns over the weak protection of intellectual property in Africa have been expressed by several brands, such as McDonald's. McDonald's is in countries such as Egypt, Algeria, and South Africa, but Kenya, for example, still does not meet that particular franchisor's market entry criteria regarding the protection of intellectual property.”

Funding structure

Kendal opines capital is another worry. Franchisors generally request franchisees commit over 50 per cent of the total investment, but African banks are cautious lenders to SMEs and start-ups. However, reforms in the African banking industry are changing the lending landscaping. Local banks in Kenya now have franchise departments and are starting to look at franchising not as a business start-up, but as a support system for business enterprises that may merit a closer inspection.

Supply chain

Supply chain issues present yet another challenge. For example, many sub-Saharan Africa countries are still in the early stages of supply chain development. African franchisees are required to maintain adequate supplies of the products that fuel their businesses and those products must also meet the franchisor's particular quality standards. For example, KFC and other fast food brands require adequate supplies of chicken that meet their standards. This may be difficult in certain African countries where the supply of chicken from local chicken farmers fail to meet the franchisor's criteria for not only food safety and security but also quality and quantity. For example, South African KFC's sell almost 10 per cent of the nation's commercially grown chicken. In these instances, local franchisees are required to purchase their supply from outside the country from franchisor-approved suppliers. To ensure adequate supply needs are met and to cut costs, some franchisors are working with their franchisees to secure local suppliers.”

Betting big on Africa

Top brand in hardware networking, Jetking Infotrain Ltd also plans to foray soon into the African market. Though the brand does not disclose its actual franchisee strength but it has successfully penetrated into almost every Indian region and now all set to open its cards on Africa.  Africa has immense skill development potential.

Harsh S Bharwani, Vice President, Dedicated Services and International Business, Jetking Infotrain Ltd opines: “Africa is attracting investor interest far beyond the traditional areas of commodities and mining to reach new opportunities in sectors such as IT / ICT, telecom, finance and retail. Many of the most alluring prospects are in business-to-consumer areas. Africa is home to over a billion people, more and more of who are upwardly mobile, with per capita income growing steadily, which is reflected in the rise in consumer spending, which grew by more than 100 per cent in the decade 2000 to 2010, and steadily rising. There is surging demand for everything from IT products, mobile phone services and insurance to appliances, automobiles, clothing and cosmetics. The process of adoption and diffusion of ICT in education in Africa is in transition. There appears to be the beginnings of a marked shift from a decade of experimentation in the form of donor-supported, NGO-led, small-scale, pilot projects towards a new phase of systemic integration informed by national government policies and multi-stakeholder-led implementation processes.  One of the primary features of this new phase is the priority that governments are giving to policy development. Different African nations have progressed differently on the scale of skill development, primarily ICT and e-commerce driven. Nigeria, South Africa, Botswana, Kenya and Zambia are more developed, in respect to other countries in terms of implementation.”

On the developments in Africa, Bharwani says: “What makes these countries stand out is the support they receive from their governments and world bodies for skill development as a key to economic development. Many initiatives and funding by the world bodies, the local government and NGOs are in place in terms of youth rehabilitation and integration to the national mainstream. A case in point is Nigeria. Global networking leader, Cisco has also identified Nigeria as one of the focal countries in the sub-Saharan region, which will be part of the cloud deployment project of over 23 Billion USD in the next five years. Nigeria as a country has 29 per cent of the total user base of mobile telephony in the sub-Saharan region. Schools, both primary and secondary have deployed IT-infrastructure, but the extent varies. What the country requires are players who have a long-term vision and partner the initiatives for change. It is often spoken that, if you need to do business in Africa, you need to think like an African. You need to be patient and the results will flow in. Africa would welcome with open arms any serious and long-term player with sound business model, decent fundamentals and the guts to deliver quality product, services and solutions.”

Fashion industry flourishing

Wellness and slimming services company VLCC has also started its operations in Africa. VLCC has set up its centre in the capital, Nairobi. Following this, the brand will launch a range of personal care products in Kenya. The brand is also planning to establish its presence in Uganda and Tanzania over the next two years. It has its operations at 300 locations across 16 countries. Luxury and leather accessories retailer, Hidesign does not operate via exclusive stores in Africa but works via distribution, selling to department stores like Edgars and many independent stores. An E-mail sent to Hidesign confirmed that they are interested in Africa. The brand believes that it is an interesting opportunity especially West Africa (Nigeria, Senegal, Ivory Coat), Southern Africa and East Africa (Rwanda, Uganda, Kenya).

Tandem Franchising

The South African franchise industry has developed a unique form of joint venturing known as ‘Tandem Franchising’ that is an innovative approach that franchisors can take to empower communities in need of economic development. In tandem franchising, the franchisee purchases a minority stake in the business and receives mentoring from an experienced member of the management team, until he or she has gained the knowledge and experience to run the business efficiently and independently. The franchisee increases his or her shareholding over time, while the mentor is rewarded based on franchisee performance. Tandem franchising also addresses the issues like lack of capital at the start-up stage.

 

 

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