International Franchising or overseas franchise expansion has been forte of cash rich franchisors.
During late 2000’s, all this started to change with introduction of web app based options and changes in franchising formats. Many local brands with international aspirations started experimenting with international franchising. The latest survey shows that 80% of these BRANDS failed, only 10% are generating profits and balance 10% are barely surviving.
The major reason of failure being, they simply replicated the local experience in overseas markets. Of course, it did not work as it faced many hurdles in execution. Each overseas market comes with its own sets of challenges and opportunities. Although there is no fixed formula of success while planning for international franchising, but avoiding some common mistakes may help.
Here we are trying to highlight some common pitfalls in overseas franchising and some solutions
Financial Capacity to build international branding.
Many of the current global brands into international franchising learnt the business hard way. Unlike some of the new brands, who relied more on delivery apps and IT systems to ramp up the offering in overseas markets. It is true that most of the successful franchisors moved to overseas markets only after realising that local market is saturated. This may not align with modern business thinking, as new businesses are developing products and services with global perspectives.
Many of these modern brands failed to do due diligence on financial resources, cultural sensitivities and understanding of local acceptability and relied solely on product or service.
The international franchisor should always seek answers to below questions before going international.
- Do we have the financial capability to run marketing campaigns in target market?
- Will we have to customize our offering for target market? If so does the cost justifies the volume
- Is local supply chain up to the standard to keep costs in control
- Sales Volume Vs. Expense (ROI)
- Brand perception or BRAND equity
Why due diligence is important?
The due diligence takes some time and requires an initial investment of money and time. Overlooking or underestimating above aspects resulted in failed expansion for many franchisors.
The best solution is to research, adapt and rework your plan more and more. Once your team can reliably tell that yes “we are financially ready to build brand in international market” .Then only start with pilot project to test the waters. The failures not only damage the brand reputation it also puts a heavy burden on existing resources.
Wrong Target Country selection
Our experience at Selloverseas.com has shown that many times franchisors prefer the inputs from overseas friends or relatives instead of certified franchise consultants. This often results in poor choices and incomplete information leading to wrong market selection by international franchise. It is important to bring an experienced professional on board and work jointly with them. Never underestimate the value of experienced franchise consultant as it always outweighs the cost of failures or revising strategy strategy mid-way.
For first time overseas franchise expansion following basic factors helps to shortlist the country
- Similar language and culture.
- Similar service or franchise business model in target country
- Availability skilled workforce and critical supplies.
- Cost of maintaining Legal franchising framework within target country
- Cost of local certifications and approval from regulatory authorities
From economics point of view it is important to undertake study for cluster of countries based on geography or regions rather than a single country. As an example the market is quite similar across GCC (UAE, Oman, Bahrain, Qatar, Kuwait and Saudi Arabia) or Nordic countries (Sweden, Norway, Finland etc.) or Indian Subcontinent (India, Sri Lanka , Nepal and Bangladesh)
How to select the International market?
Many F&B franchisors have been more successful by concentrating on cluster or countries rather than staggering their resources in multiple diverse countries. As F&B franchise works typically well through single master franchisee for a region. Also the critical supply and marketing campaign can be centralized regionally.
The decision on size of target market should be influenced by forecasted sales volume and common law instead of size. A unified trading bloc tends to have uniform legislations and currency fluctuations. This further helps to mitigate financial and legal risks.
Selection of Franchise format
Whether you are searching for overseas education franchisee or F&B franchisee. The selection of franchise format is critical for developing franchise route to market. For example overseas education franchise can follow online delivery format or a hybrid model of online and offline. Similarly F&B franchise can have unit franchise or master franchise or cloud kitchen depending on service (example fast food, fine dining or retail outlet). International market landscape can also influence the type of franchise for example agency franchise, brand licencing, managed services or joint venture depending on legal or regulatory requirements of the country.
Their very few experienced franchise consultants who have real understanding of franchise format selection. The selection of format directly influences the associated investment costs and expected returns.
It is always advisable to do a pilot test of delivery format in overseas markets. This allows fine tuning of strategy and creates a BRAND pull for right franchisee. Many franchisors agree to one sided contracts with international franchisee and face roadblocks in expansion plans. The flexibility during initial stages is of utmost important while entering in new international markets. A cautious approach in short term builds the sustainable business model in medium term.
Overseas Franchise fee or Brand Royalty
This is the most complex part of overseas franchising. Beside the associated costs it also needs to take care of taxation and cross border financial transactions. In international franchising the fee is undoubtedly function of many variables
- Length of franchise contract
- Overseas training and support.
- Cost of meeting regulatory requirements.
- Translation or creating localised marketing material
- Fine tuning the systems (software, billing etc.) to meet target market compliances.
The dilemma is if this figure is too low, franchisor may not recover the initial investment. If it is too high the franchisee may not reach acceptable level of profitability. Only an experienced franchise consultant can work out a balanced approach acceptable to all stakeholders.
The brand royalty rate further complexes the equation in international markets. The best way is to develop a responsibility matrix and clearly define the roles and responsibilities. This not only helps to create accountability but also clarifies the associated cost to franchisor and franchisee. The cost clarity leads to clear division of profits and future upgrades.
A clear vision, backed by numbers and documented plan always gives the confidence and power to negotiate. The overseas franchise market may throw in surprises at every stage. A steady hand from experienced team in international franchising can be rewarding in so many ways – certainly financially.