5 Common Mistakes Franchisors Can Make in A Global Expansion

January 25th, 2019 by Ritwik Donde

When the topic of international development comes during strategic planning sessions at many a franchisor, many are quick to dismiss the opportunity, sighting costs or potential untapped white space in the U.S. market. Such lack of clarity can be a serious problem for franchisors embarking on a rapid growth plan, often resulting in mistakes that can put the franchises at risk. This article covers five common mistakes made by international franchisors, and provides suggestions for avoiding or mitigating them.

 

Mistake #1: Using a one size fits all strategy

This is one of the most common pitfalls for franchisors looking to expand in global markets. Take pricing for example, a product pricing model that works in Germany may not work in Norway or Sweden, even though all these markets fall under the European Union laws. This also applies to branding & messaging the franchise, fees charged to franchisees, and pretty much all aspects of a franchise development strategy. Case in point – Denny’s. Although Denny’s is known for its freestanding restaurants in the U.S., the company has a more flexible footprint for international locations and has opened in malls, casinos, hotels and airports. Denny’s restaurants in Central America are 5,000 square feet, 1,000 square feet larger than in the United States, since the restaurants in that region often cater to larger families and groups.[1]

Conclusion: There is no “one size fits all” solution to international expansion. Such ventures need to be carefully structured to reflect the needs of the business, the target market and the franchise partner.

Mistake #2: Inadequate vetting of each planned market expansion

This potential pitfall is not limited to understanding the consumer demand for a franchise’s product or service. Failure to understand acceptable culture around soliciting franchisees, competitive fees and ill-informed understanding of in-country direct and indirect competition can often lead to challenges in a successful global expansion. Take allocation of fees for example. It is important to know about what is the “right” level fee to be charged. For instance, in Japan, while master franchising may be the most common alternative here, large upfront franchise fees often deter investors from signing up no matter how successful a franchise you are.

Conclusion: As a rule of thumb, fees should be determined only after estimating associated expenses. With that in mind, costs of closing an international transaction can be significantly higher than a domestic transaction.

Mistake #3: Lack of understanding around the appropriate development model

Most studies of international franchisors indicate that 80 to 85 percent of U.S. franchisors usually use master franchising as their typical expansion approach. However, off late we have been hearing a lot of U.S. franchise development complaining that too many master franchisees were not succeeding. Close to about 20 percent of the international master franchisees fail to open a single unit.[2] While a master franchising strategy could work for a smaller single market like Southeast Asia, where a franchisor would have to scout for a single master franchisee, larger markets like the U.K or Brazil may need a more fragmented approach towards development. Subway, for example, has regional developers in market like France and Germany, with market sizing for each developer conducted on the basis of population density and consumer expenditure patters. On the other hand, offering an entire Nordic region to one master franchisee is not uncommon in Eastern Europe. McDonald’s just recently signed up Terra Firma Capital Partners Limited as its master franchisee for the entire Nordic region i.e. Denmark, Sweden and Norway.

Conclusion: The key to success is obviously having a strong business concept, but it is also necessary to ensure that the overall structure adopted is one that suits the individual business.

Mistake #4: Not checking on the availability and maturity of franchise financing systems

Franchisors may encounter that there are more international markets where lenders need to be educated about franchise financing. Take Australia for example. There are four big banks where most financing is concentrated, then there are a lot of smaller regional lenders that are not as sophisticated and focus on their specific geographies. These four banks offer a franchise accreditation program of some kind which recognizes the strength of a franchise brand and business model to generate strong cashflows for a new outlet. While such programs are common at the Big Four, these have recently begun to feature at second-tier Australian banks.

Conclusion: Franchisors would be well advised to find a financing partner in countries like Australia, who can best help in navigating the local waters, and create structured relationships with large lenders.

Mistake #5:  Not understanding the cultural risks

Whether it’s crossed legs at a meeting or an informal email response, the simplest of gestures can mean the difference between landing an overseas deal or going home with nothing to show for your trouble. One American company found it the hard way. It wanted to open a factory in an Asian country where the majority of the workforce was Buddhist. They managed to learn that a statue of Buddha had to be erected at the main entrance of the plant, so that employees could bow in respect as they come in to the plant. On the day of the opening ceremony, one of the guests observed that the statue at the entrance is visible from the bathrooms in the factory, local workers were shocked by the disrespect that the U.S. company had shown with such a design and refused enter the factory. The company then had to spend a lot of money on reconstruction, too much capital lost.

Conclusion: International expansion has opened numerous doors for small businesses looking to uncover new streams of revenue. But in order to succeed globally, business owners must successfully navigate the new territory of cultural divides.

 

Among 480 small and medium enterprises from 12 countries surveyed by the Economist Intelligence Unit in 2014[3], a majority foresaw expanding their business internationally as the future for their companies. But very few understood the importance of a right advisory partner to help them navigate the choppy waters of international growth.

 

[1] Franchise Times

[2] Franchising.com

[3] Entreprenuer Magazine

 

This article was republished on Franchising.com on February 13, 2019.

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