Successful International Expansion For Small to Medium Sized Franchise Networks
March 2010 Franchising World
Successful international expansion requires a methodical approach.
By Andrew Simpkin
There is an implicit presumption that international expansion equals a large franchise network which equals large budgets. For many members of the International Franchise Association this may indeed be true as U.S. based franchises can often have a large market as a home base. However there are an increasing number of IFA members outside the United States and international expansion can then be driven by very different criteria and with less resources available. In addition, there are many reasons for international expansion; it could be because the “home” market is small or becoming saturated or simply because a U.S. franchisor resides on the borders of Canada or Mexico and would see an international expansion as being as much of a natural development as launching on the far side of the country.
The challenge then for an small to medium-sized franchise network is achieving this expansion in a structured way, on a limited budget and without losing control of the business both at home and in the target market.
One of the risks that an SMFN is particularly vulnerable to in international expansion is that it happens in a reactionary way in response to interest generated at a trade show or when a person familiar with the franchise in its home country is moving abroad, or even stimulated by a casual approach made by a third party over the Internet.
Successful international expansion requires a methodical approach and whether your franchise is an SMFN with limited resources or a larger franchise network, the process needs to be thought through thoroughly.
One mnemonic for an approach to the challenge is the four “P”s.
It is true that “few plan to fail but many fail to plan.” In large companies whole departments can be given over to the planning side. This luxury is not normally available to the SMFN but it remains vital. The plan will have numerous stages and should include the following as a minimum:
• Strategic plan: This needs to look at the rationale for international expansion. Why, as a company are you doing this? There need to be sound reasons since international expansion is not for the faint-hearted and under no circumstances should international expansion be driven by ego. Where you plan to expand by country is critical. There are many points to factor into this area amongst which would be:
1. Size of potential markets,
2. Per capita GDP in target markets,
3. Legal maturity of target markets,
4. Compatibility of concept with target market culture,
5. Viability of other more mature franchise systems in the target market,
6. Direct competition in the target market,
7. Potential language and cultural barriers, and
8. Physical accessibility of the target market to current operations.
When you are planning to carry out the expansion is important to identify early. Speed-to-market may be seen as important but the two guarantees that you have when embarking on international expansion is that it will take longer than anticipated (a factor of two seems to be the norm) and will inevitably cost much more than expected, so try and use both resources£time and money wisely.
Your plan should be a “living” one that is revisited and updated regularly. From a “mud map” you should aim to eventually, with the help of resources which we will get to shortly, arrive at a detailed business plan which should allow you to drill down to projected profitability for franchisees, area developers, master franchisees and finally, the franchisor.
During the early planning stage there is a useful resource online at www.elance.com . By using this system, which can compare to hiring a quality research assistant, you can approach non-competitive franchisors in your home country and simply ask for advice. For example, if you are U.S.-based, you may want to research all franchisors that have successfully expanded from the United States to France, then via elance you should be able to get someone to pull together a list of the companies and all contact details in under a week for a couple of hundred dollars.
A critical part of a strategic plan should include an agreed methodology for recruiting master franchisees (or territory developers) in the priority target markets and a methodology for responding and dealing with inquiries and interest from non-target markets. You cannot advance on all fronts at the same time, so clear prioritization and discipline is required.
Whatever your planned approach, there appears to be a consensus in the franchising industry that simply getting a master franchisee in a target country to pay the franchisor a chunk of money and then letting them get on with things in splendid isolation is irresponsible, cavalier and ultimately not in the long-term best interests of the franchise system.
Protection can cover many aspects of a successful international expansion. The starting point would normally be the brand or trademark. Can you protect it ? Is it already registered in the target country? Clearly in the case of a SMFN you cannot hope to register and protect yourself in every country. The simplest thing to do is draw up a list of potential target countries and start with the most attractive and slowly, over time, and as resources permit, work down the list protecting as much as possible, as quickly as possible.
The next most important thing is to protect yourself as a franchisor. This means looking at the best way to control your system as you launch into a target country. Areas to look at and to think about getting confidentiality agreements in place would include but not be limited to, site or facility construction, layouts, product, IP, equipment, manuals, franchise agreements, disclosure documents, images and anything which a competitor could benefit from having acquired at your expense.
This is a multi-dimensional area and is taken to include both the product suitability to market, as well as the supply chain implications in their many guises. Product suitability falls into the area of selling “ice cream to Eskimos.” Normally seen and viewed as a naturally hard sell, one should try and ensure, where possible, that there is a willingness in the market to try and then ultimately enjoy the benefits of your product and system. The challenge for an SMFN is how to achieve this product suitability check in a robust yet inexpensive fashion. Much depends on the product offering but especially if it is a new product or concept there is much to recommend a “Proof of Concept.”
This would normally involve the franchisor launching a pilot store or outlet and by using all its experience to allow the concept the very best chance of success. There are, of course, costs associated with this but after a successful POC it is much easier to then get master franchisees and franchisees interested. In simple terms, it moves the earliest risk in a new country business cycle on to the franchisor and frankly, if the franchisor is not prepared to back his system and judgment (with local advice) then who should?
One of the other key aspects to check in the product area is the supply chain. Some of the products you may well be able to source in the target market but there may be others that are part of your IP operations which will need to be exported from your home market to the target market. Ensure (preferably by doing a trial at the time of POC) that imports will flow and that excessive duties and costs will not suddenly be incurred. If there are issues then the POC period is exactly the time to identify and resolve these issues and build them into your plans.
This is by far and away the most important “P.” People do business with people and if you are looking at international expansion then at many levels you will need good people.
Often overlooked when it comes to international expansion is the “stay at home team.” There is a serious danger that international expansion for an SMFN will mean that your best team members are distracted from their normal roles and your main business (the one that is probably going to have to provide some of the funding for the expansion) starts to get wobbly and begins to underperform. International expansion that overstretches your core can be disastrous.
Having ensured that the core is stable with the right people in place, the next important people to get on the team are a good local legal resource who in turn should be able to connect you with a reputable and experienced consultant who understands the local environment and franchising.
Together this local resource should be able to help with choosing the most appropriate legal structure, advise on the business model and help pull a detailed business plan together.
As you move through to “Proof of Concept” and beyond you will need to put people and resources in place. There are many ways of doing this, from taking on employees, to getting a first master franchisee in place, to employing a contractor or consultant. All have pros and cons and much will depend on the systems and structure you are adopting and the local advice you are being given.
Though there are many challenges with any international expansion, for an SMFN with limited resources, a poorly-planned and badly-executed expansion could be disastrous. The damage is likely to be not only financial but also to the franchise system’s reputation, as well as morale at home. Combined, these problems will inevitably slow further growth plans.
There are many examples of successful international expansion by SMFNs and many in franchising who are only too happy to give good advice to non-competitive franchises from the same home country looking to expand to similar target markets. Networking within the IFA and the franchising industry, getting wise counsel and doing due diligence at critical points during the planning process will all help ensure success, and did I mention, get the right people.
Andy Simpkin is managing director of Cafe2U International Pty Limited. He can be reached at +61 2 8966 4350 or firstname.lastname@example.org .