International Franchise: Things to consider before expanding into foreign markets
Over the last decade, a growing number of franchises have been attracted to international markets to boost sales and profits as the domestic market has become increasingly saturated with outlets and much tougher to scrunch growth.
Although international expansion is not a good idea for a new franchiser, it is an appropriate strategy for an experienced franchiser. Both the cost and the complexity of franchising increase as the distance between the franchiser and the franchisee increases.
However, complex legal and regulatory requirements and cultural differences make international franchising challenging for inexperienced franchisers. Franchisers should consider expanding into global markets when foreign markets present an important growth opportunity for the franchise and when they meet the following criteria:
1. Identify the country or countries that are best suited to the franchiser’s business concept. Factors to consider include a country’s business climate, demographic profile, level of economic development, rate of economic growth, degree of legal protection, language and cultural barriers, and market potential. Franchisers making their first forays into global markets should consider focusing on a single nation or a small group of similar nations.
2. Generate leads for potential franchisees. Franchisers looking for prospective franchisees in foreign markets have many tools available to them, including international franchise, trade shows, their website(s), trade missions and brokers. Many franchisers have had success with trade missions such as those sponsored by trade groups like International Franchise Association. These trade missions are designed to introduce franchise candidates in target countries.
3. Select quality candidates. Just as in any franchise relationship, the real key to success is choosing the right franchisee. Because of the complexity and cost of international franchising, selecting quality franchisees is essential to success. Establishing an intranet allows franchisers to stay in contact with their international franchisees regardless of their time zones
4. Structure the franchise deal. Franchisers can structure international franchise arrangements in a variety of ways, but three techniques are most popular: direct franchising, area development, and master franchising.
- Direct franchising, so common in domestic franchise deals, involves selling single-unit franchises to individual operators in foreign countries. Although dealing with individual franchisees makes it easier for the franchiser to maintain control, it also requires more of the franchiser’s time and resources.
- Area development is similar to direct franchising except that the franchiser allows the franchisee to develop multiple units in a particular territory, perhaps a province, a county, or even an entire nation. A successful area development strategy depends on a franchiser selecting and supporting quality franchisees.
- Master franchising is the most popular strategy for companies venturing into international markets. Here, a franchiser grants an experienced master franchisee the right to sell outlets to sub-franchisees in a broad geographic area or an entire nation. Although master franchising simplifies a franchiser’s expansion into global markets, it gives franchisers the least amount of control over their international franchisees.
Franchisers in international markets sell virtually every kind of product or service imaginable – from fast food to daycare. In some cases, the products and services sold in international markets are identical to those sold in other countries.
Most franchisers have learned that adaptation is the key to making sure that their goods and services suit local tastes and customs.