A step-by-step approach to new market entry for franchisors

Grant Thornton A step-by-step approach to international expansion for franchisorsIt’s natural for food and beverage franchisors in the U.S. to look for opportunities abroad — after all 95% of the world’s customers live beyond our borders. But before your company leaps into international franchising, you need to be prepared. It is essential to have a comprehensive plan to deal with the tax, regulatory, legal, cultural and operational factors related to entering a targeted foreign market.

“You really have to do your due diligence, and go in with your eyes open,” says Ciara Jackson, national leader of the Food and Beverage practice for Grant Thornton Ireland. “[It’s important not to] get so excited by the opportunity and the potential profit — with dollar signs in your eyes — that you don’t think about the checks and balances you’d complete in a normal business transaction.”

Consider markets beyond China and India In the past, companies were often opportunistic — jumping into developing markets when they saw an opportunity or were approached by individuals keen on introducing a new dining concept to a new market. But with increasing competition and more foreign countries imposing stricter rules on franchising, it’s important to be strategic about whether and where to expand abroad. While there’s an obvious draw to expand into vast consumer markets like those in China or India, it’s important to consider places like sub-Saharan Africa, which has countries with rapidly growing populations, expanding middle classes and a strengthening infrastructure.

Some European nations offer opportunities for the right types of niche franchisors: Ireland is often a good testing ground for countries in the European Union, and the UK population is forecast to grow significantly in coming decades, in stark contrast to other countries in the region. The economy of the United Arab Emirates (UAE), where almost 60% of all international food and beverage brands have operations, is also growing at a fast clip. “There are 3 billion people within a 1.5-hour travel radius,” says Hisham Farouk, managing partner at Grant Thornton UAE.

4 questions to help you build a business case for international expansion 1. Do you know the ROI of expansion? Given the complex operational factors involved, international franchising is not likely to produce immediate short-term profits. That means companies need to be prepared to make upfront investments. Ask yourself, are you well-positioned to take on some risk and support a new business? The costs of helping international partners are higher than you might anticipate, although the licensing fees earned might also be higher.

2. Do you have resources?You will have to consider whether you have the staff and other resources to train and support franchising partners abroad. Your partners will need advice in setting up a supply chain and IT infrastructure, as well as guidance in adapting your products to local market conditions and maintaining your quality standards. Also, consider the language requirements and time differences between countries and how that will impact your ability to offer effective and timely support. In Spain, banks open at around 8:30 a.m. and close for the day at 2 - 2:30 p.m. Businesses in the UAE are closed on Friday and Saturday and are open on Sunday. Does your company have the staff to support franchisees on what are traditionally days off in the U.S.?

The bottom line is, don’t skimp on conducting due diligence of your franchise partners prior to entering into an agreement. Establishing a mutually beneficial franchise relationship is critical to the success of your international expansion.

3. Do you know the local franchising rules and their impact on your operations?Some countries, including China and Brazil, impose foreign exchange control restrictions that limit the movement of currency beyond their borders. Such rules — which are set up to prevent the exit of money in times of fiscal crisis, among other policy considerations — may mean additional reporting requirements and delays. For example, Chinese businesses must obtain approval or perform foreign exchange control procedures to make or receive foreign payments, while Brazilians must go through the Chinese foreign exchange control mechanism, including the Chinese tax authorities. Equally important, the franchise agreement must be registered with the relevant Chinese authorities, according to Sandy Chu, principal and national leader of Grant Thornton LLP’s China Business Group.

In some regions, existing regulations may actually benefit foreign companies. The UAE, for instance, offers lucrative investment incentives and opportunities to local and international investors. Most notably, there are no corporate or income taxes, no personal income taxes and no foreign exchange controls. The UAE also permits 100% repatriation of capital and profits, among many other benefits that attract foreign investors.

4. Are you familiar with the local banking and legal systems? Any company expanding overseas will have to assess the level of transparency in the foreign country’s banking system, as well as the robustness of its laws regarding trademarks and intellectual property, which must be protected to prevent piracy. Many governments have become extremely vigilant in monitoring nonresident financial activity. In some cases, banks will require site visits or other due diligence reviews before allowing foreign nationals to open accounts.

How to create an international franchising business plan Once you have decided to expand overseas, the next step is to create a comprehensive international franchising business plan.

1. Research the prospective market(s). You’ll want to investigate the region’s food and beverage climate and determine whether there is a long-term need for your offering. Take into account consumers’ purchasing and dining habits, level of disposable income, interest in Western food offerings, and cultural or religious traditions regarding what, when and how to eat. For example, fast food, an everyday convenience in the U.S., may be a rare splurge in other countries. Location is also important. In India, restaurants do well in malls and near entertainment venues. “India’s pastimes are not hiking or going to the beach, they are around entertainment,” says Vinamra Shastri, partner and regional markets leader for Grant Thornton India.

Your analysis should identify the likely competition for your brand, and carefully evaluate those competitors’ business models, successes and failures in order to learn from them. Over the past decade, there has been an increase in small companies entering foreign markets, as well as more homegrown franchises — this means more competition for your brand. It is best to expand into countries that are not oversaturated with Western brands or local versions of them.

You may find significant gaps in certain markets. For example, residents of smaller cities in China may be eager to try Western-style dining models — including sandwiches, which may be an unfamiliar concept. There may be a need for casual halal dining options in Islamic countries. And in emerging markets around the world, affluent consumers may be interested in high-end offerings. Under the right circumstances, introducing a new brand can lead to significant profits.

2. Find the right niche. Be selective when scouting cities for test markets. “We had a client that was looking to go to India, which offers tremendous opportunity,” Jackson says. “Look at five or six key cities and try to understand the demographics in each, consumers’ purchasing power, flavor preferences, cultural impact factors. Then try to figure out which city might be the best testing ground. Sometimes the right thing to do is to start small and build and learn from it.” Shastri agrees. “Every 100 kilometers in India, the dialect, the taste, the food, the habits, the culture changes a bit.”

3. Adapt your product line to local preferences. It may be necessary to adjust your products to meet local tastes or an acceptable price point. This may go against the grain of the franchising concept, which is to extend a consistent brand regardless of location. Clearly, your standards for quality products and a good consumer experience should remain high, but it’s important to customize your approach to meet local norms.

A good example of this is Cinnabon Inc., which has succeeded in the U.S. by selling its products in malls and airports. But malls are less common in other countries, prompting the company to seek out street locations that receive significant foot traffic.1 Taste preferences also vary. Since cinnamon doesn’t generally appeal to the Chinese, Cinnabon has not moved into that market. It’s also made modifications to its recipe in countries that want the company’s hallmark product to be even sweeter: Customers in the Middle East prefer the cinnamon rolls with added caramel and chocolate, Cinnabon CEO Kat Cole told The Wall Street Journal.2

4. Choose the right franchise type. Your business plan will hinge on which type of franchise you’re proposing, be it a joint venture, a master franchising arrangement or a deal with an area developer who takes responsibility for locating viable business partners but cedes control on management issues. Each model has strengths and weaknesses that you should consider with regard to your own business needs, as well as the market you’re targeting. Under master franchising arrangements, for example, you will need to find a reliable partner with the operational and business experience to build and support a network of franchisees. This task is comparatively easy in the UAE, where some master franchisees handle as many 40 brands, have access to the best real estate, and possess the leverage to negotiate lower rents, Farouk says. The area developer approach will give you more direct control over your brand, but it will require you to do more on-the-ground canvassing and development.

No matter what franchise type you choose, make sure your agreement allows for sufficient monitoring ― compliance means different things in different places, and you need to be prepared for all scenarios.

5. Hammer out a funding plan. The next step is to formulate a strategy for capital funding. Some countries don’t allow overseas capital investments, while others have rules that prevent overseas companies from raising capital locally. So, how will you get funding into this business? How will you put working capital into the business, and where will that come from? The home base or the new country?

“If profits are made, are they going to be kept in country or repatriated to the home country?” asks Jackson. “At the risk of sounding like a politician, there is no right answer as to which business model is best. It’s more about finding the one that suits a country’s regulatory environment.”

6. Protect your brand. As you prepare to enter a new market, you should file for trademark protection as soon as possible. Some countries have first-to-file rules, which may mean that you have to contend with pirates who register your trademark and then try to sell it back to you at a premium.

Use a proactive marketing campaign to let consumers know what sets your product apart. This type of advertising can blunt the impact of foreign imitators and make your offerings even more desirable overseas.

7. Know the physical and IT infrastructure. Developing economies like India and China have put significant efforts into building robust IT networks. Other countries may lag behind, and this could affect your ability to maintain good connections with franchisees. Infrastructure is especially important if you have a perishable or high-value product. How will you safely, reliably and affordably get it to where it needs to be? Are there high-quality warehousing and distribution networks? What about reliable roads or other transport options so that you can ensure your product isn’t stolen in transit? “Warehousing in designated zones or areas in China has gotten a lot more expensive because of the limited space,” says Chu. This problem has been exacerbated by the influx of new franchises.

Expanding abroad with open eyes Despite these challenges, companies that are aware of the economic, cultural and regulatory characteristics of a given country can find great success in overseas expansion. But proceed with caution: Missteps in trademarking, market assessment and planning for capital investment can be costly and distracting. Thorough research, a robust business plan, brand promotion, and a willingness to adapt are the key ingredients to success abroad.

International expansion best practices