Global warming: franchising heats up around the world

Entrepreneur, April, 1997 by Janean Chun

Like explorers of old, American franchisors are striking out in a race to claim these lands for their own. "If you had to pick one trend in terms of where franchising is going in the next 10 years, the real growth is going to be in markets outside the United States," says Mark Siebert, president of Francorp Inc., an Olympia Fields, Illinois-based international management consulting firm specializing in franchising.

According to a recent survey of 40 countries by accounting and research firm Arthur Anderson, 56 percent have fewer than 200 franchisors. Countries outside the United States boast an average of 252 franchisors and only 12,253 franchisees. "Some of these international markets [are seeing franchise] growth of 40 percent a year," says Siebert. "There's never been a greater opportunity for franchisors to go abroad."

The call of international franchising is getting harder for even the smaller franchisors to resist. "An increasing number of American franchisors are looking at the international option sooner. In many cases, the rationale for that is they are either dealing with a highly competitive domestic market, have saturated the domestic market, or simply perceive the great opportunity abroad," says Siebert. "In fact, smaller franchisors are where a lot of the [international] growth is coming from these days."

Being caught in the whirlwind that is international franchising can be intense. "Basically, the whole thing is kind of odd," admits Rich Rector, president of Realty Executives International, a real estate brokerage franchisor based in Phoenix. "I don't have an office in Austin, Texas, and yet I have an office in Bangkok."

When Realty Executives started franchising in 1988, Rector intended to establish a presence throughout North America and never expected to be jolted into his two predominant foreign markets - South Africa and Thailand - quite so quickly.

So does it sink in that Rector now has seven offices in South Africa and 26 locations in Thailand? "If you had asked me five years ago about international franchising, I would have talked about North America. I hadn't any clue about [any of this]," he says. "It's really weird."

Weird or not, it's definitely lucrative. "I can make a lot of progress [in Bangkok] without making a bunch of mistakes and taking time deciding between steps," says Rector. "That leads to incredible opportunities."

However, Rector also found obstacles to international franchising can be sizable. His first challenge in Thailand: overcoming the cultural taboo against selling a home. "Things have always been handed down through the family," says Rector, "so if a house is for sale, it's assumed there are financial problems."

On an industry level, Rector faced the task of breaking into a country that didn't even recognize residential real estate brokerage as a business. "There's no licensing law, so there's no regulation of who can or can't be a real estate agent," he says. Rector and his Thai affiliate professionalized the industry by creating a school to educate people about the process and helped to form a trade association to demonstrate their professionalism to the public.

For franchisors who brave uncharted foreign territories, extra effort is almost always required. And, for an industry that's traditionally relied on the ease of a cookie-cutter approach, being flexible enough to make these efforts is sometimes as difficult as turning a huge battleship on a dime.

"Different countries have different foods, different clothing, different modes of business etiquette," says Leonard Swartz, worldwide managing director of franchise services for Arthur Andersen in Chicago. "Today's [franchises] must adjust their domestic businesses to meet the international cultures. They must be firm and command quality, while remaining flexible."

* BREAKING BARRIERS

Though the luxury of uniformity may not be accessible when doing business overseas, U.S. franchisors that persist through the trial-and-error period seem to learn certain secrets to success. Some of these secrets include:

Market research: "All too often, companies determine an international expansion strategy based on a reactionary strategy - they happen to get an inquiry from Kuwait, and all of a sudden they're interested in the Kuwaiti market," says Siebert. "Franchisors should target certain regions. As part of your research, determine what markets are going to be big for your product or service, what current competition is serving those markets, and any barriers to entry."

To connect with businesses and U.S. embassies in other countries, Siebert suggests attending overseas trade missions or trade shows put on by organizations such as the U.S. Department of Commerce. Yet don't expect the quality of market research to match that of America.

"In many countries, there isn't enough marketing information," says Swartz. "You have to get out there and pound the pavement."

* Capitalization: Siebert lists undercapitalization as one of the most common mistakes U.S. franchisors make. "They don't know they're making a significant commitment to the success of their foreign licensees, and it's conceivably going to cost them a lot of money in the first several years while units are getting established in that market," he says. "The real profit centers are not [franchisees'] upfront fees but the ongoing stream of royalties generated from successful penetration of a market."