Franchising the globe

Domestic franchise success may have entrepreneurs dreaming of world domination, but as AMITA TANDUKAR explains, there is more to international franchising than letting the royalties roll in.

By Amita Tandukar

Domestic franchise success may have entrepreneurs dreaming of world domination, but there is more to international franchising than letting the royalties roll in.

The Australian market is only 1.6% of the global economy, so when a franchisor strikes upon a successful product, service or business model, it’s only natural that they dream of overseas expansion.

Email and websites mean entrepreneurs can connect with potential franchisees in far off lands, and government export agencies are better equipped than ever to help launch an Australian brand overseas.

However, the reality of international franchising is not all easy money and a flood of franchisee inquiries may not equal profitable growth in a market. Even well-established franchise systems require a careful overseas expansion strategy backed by head office support to ensure export success.

SmartCompany talked to experienced international franchisors and advisers to answer five big international franchising questions.

When should I start?

A franchise system should be almost at the limit of its Australian growth before considering international options.

Angus Raine, the chief executive of real estate agents Raine & Horne, warns that international expansion stretches capital and human resources in the usually small head offices maintained by a franchisor. He says Raine & Horne International has expanded to 15 countries in the last 25 years because buyers value the ability to access a trusted brand for overseas property.

“Be wary of doing it because of ego,” Raine says. “The numbers may make sense, but it also underpins our Australian business model.”

Adrian McFedries, managing director of advisory firm DC Strategy, says franchisors should be wary of exporting before they are ready.

A common reason given by franchisors for pursuing overseas expansion is a perception that the number of potential franchisees is dropping in Australia. Analysis by DC Strategy shows that the number of new systems has increased rapidly to 1100 unique systems, but the number of potential franchisees has not, resulting in fewer inquiries per system.

Another common mistake is preoccupation with first mover advantage.

“It’s total rubbish,” McFedries says. “If you look inside an industry and identify competitors, then any small business will only have 5% market share. The other 90% will always be there.”

Many first movers are forced to spend extra dollars on marketing to educate a market, only to eventually lose ground to better-managed rivals.

Global economic conditions are a third element that may deter potential exporters. But McFedries says the current downturn is not uniform and even in the US there are pockets of stability. Companies that are keen to pursue overseas growth should view the conditions as an opportunity. For example, the closure of 61 Starbucks stores in Australia led to vacancies in prime locations – that trend is being played out around the world.

Where should I start?

Country selection is a complex decision that must be aligned with each company’s brand and strategy.

Jim Cornish, co-founder of Ecowash Mobile, says the brand’s initial expansion had been guided by recruiting quality franchisees. The first master agreement was signed as a joint venture in 2006 when a Saudi Arabian consultant expressed interest. The Middle East turned out to be a good first choice for the system, which uses a polymer compound to wash and detail cars instead of water.

“There are not as many differences as you think,” Cornish says.

The environmental advantages of Ecowash were immediately apparent, and the operating manual did not require many changes when translated into Arabic. A second European master agreement created vertical integration with the French company that supplies the polymer product exclusively to Ecowash.

The United States was the next target, he says, because of overwhelming interest from potential franchisees. From a million hits on the Australian website, half were from the US.

Ecowash predicts there will be 1000 US operators in two years, but the market has thrown up some challenges. “You think it’s going to be the same, just 15 times bigger, but it didn’t turn out that way,” Cornish says. The operating manual required significant changes to language and references to business procedures.

However, US experience also strengthened the business, according to Cornish. While recruiting at franchise conventions, Ecowash discovered new, more sophisticated services for franchisors. For example, a new technology platform purchased in the US is now also used in Australia.

The international strategy of retailer Gloria Jean’s Coffees (GJC) has changed since Australian master franchisees Nabi Saleh and Peter Irvine bought the overseas rights (including existing operations in six countries) from the US founders in 1996.

Rudi Sellas, GJC’s global franchise development manager, says many US firms make mistakes by jumping in too quickly. “It is planting the flag, where anyone who wants the brand gets it and there is a lack of close supervision.”

The revised strategy requires each master franchisee to present a detailed business plan and assistance to ensure long-term development of the brand under 10-year agreements with a 10-year renewal. As of August 2008, the GJC network had expanded to 437 stores in 31 markets outside Australia.

India and China are two of the most exciting markets, but gaining traction in the world’s two largest countries is not as easy as it first seems, warns Sellas. In terms of coffee, they are not greenfields – an Indian brand Café Coffee Day dominates with 600 stores, and China already has 300 Starbucks stores. “They are not gold mines, but they are significant long term markets,” he says.

McFedries from DC Strategy agrees that India and China are exciting prospects for the future, but says there are also some obstacles. In China there is still uncertainty in franchise law. India, while sharing an English system of law with Australia and boasting some large franchise chains, does not have quality franchisees at a lower level.

Emotion often plays a role when franchisors select markets, says McFedries, when the type of rational market analysis favoured by DC Strategy turns up very different options.

Who can I trust?

Franchisees with business experience and relevant market knowledge are essential to any successful strategy.

Travelling to a new market is vital to forming productive relationships with partners, according to Angus Raine from Raine & Horne. His father Max Raine, the company chairman, started visiting Asia in the 1980s and signed the first partnership in Malaysia in 1982. The family company has favoured a gradual expansion and the network of 16 countries now delivers the company $10 billion in annual turnover.

Tapping the large network of Australian expatriates is a good way to check business credentials, Raine says. “Check out the bona fides of anyone you entrust with your brand because they can do enormous damage,” he says.

Gloria Jean’s Coffees requires every master franchisee to visit Australia to learn about the brand and test whether there is a compatible corporate culture before an agreement is signed.

How can I support international franchisees?

Technology is making training and support of franchisees easier and cheaper.

Raine & Horne has 200 hours of online training, including podcasts and videos. Online reporting software now also allows offices to benchmark with similar size franchises, but Raine & Horne only monitors revenue, not profit.

The team supporting global operations at Gloria Jean’s Coffees takes an even more active role, resulting in global annual revenue of more than $250 billion. All senior executives must attend training in Australia, dubbed Coffee University, with specialised courses of three to five weeks for each function.

On return, executives set up their own Coffee University and business performance, including profitability, is monitored closely.

“Our review is more like training and counselling rather than being a policeman,” Sellas explains. “They may deliver royalties on top line sales, but they will develop the market in line with their profitability.”

How do I protect my brand but keep costs down?

Companies must be prepared to defend the global brand from its new vulnerabilities by investing in legal safeguards.

Cornish from Ecowash Mobile learnt about the danger of mounting legal costs the hard way when entering in the US market. Initially the company registered a master franchise agreement in 14 US states (the other states had a simple lodgement requirement). However after deciding to change the model to offer individual franchises directly, the registration process had to be repeated.

Cornish nominates the internet as the biggest headache in the second area of important legal protection; trademarks. Ecowash has registered 50 domain names in its short four-year history.

Sellas warns all franchisors that it takes a substantial investment to trademark in countries where the company may not operate immediately. He kept costs down during the expansion of Gloria Jean’s Coffees by using his own training as a lawyer to strengthen the franchise agreement template and only employing overseas counsel when targeting a particular country. However increased workload will soon force the company to hire its first full-time lawyer.

McFedries from DC Strategy says franchisors need to realise the legal costs are a worthwhile investment. “They think legal costs are spiralling out of control because they don’t think about it relative to the size of the asset they are building.”

His tip is not to get talked into registering trademarks everywhere. Instead, find experts that specialise in international franchise law, because several legal jurisdictions could apply.

Read more on franchising, trademarks and export