International Franchising and Licencing

http://www.franchise-chat.com/resources/international_franchising_and_licensing.htm

INTERNATIONAL FRANCHISING AND LICENSING

by Dr Callum Floyd

Overseas markets are attractive to local businesses, as they are often perceived to represent huge, untapped potential - many times the home market’s size. For example, from a New Zealand perspective, Australia has more than five times our population. Britain is similar in landmass to New Zealand but exceeds its population by a multiple of 15. The United States of America is much larger again – and each of the aforementioned countries have per capita income much greater than New Zealand. Many Asian markets are also increasingly attractive to local exporters, particularly India and China. International franchising and licensing enables companies to efficiently leverage their most valuable asset, their brand and associated intellectual property (encompassing trademarks, patents, know-how, and business and marketing systems) in return for royalties and/or products sales. Franchising and licensing reduces the requirement to invest company resources in expansion by instead recruiting international franchise/license partners who a) provide the capital establish local operations, b) are more motivated than employees to succeed, and c) have the important knowledge of their local markets. The partners, in turn, need to operate within strict brand, business and operational guidelines. The partners are then rewarded by profits and the franchisor, importantly, receives royalties and/or product sales in return. Harnessing the potential of internationalization is an exciting prospect. Yet it also presents a complex set of decisions and challenges that require addressing in a methodical and structured way. A key initial step in the internationalization process is an assessment of export readiness. Exporting is challenging on resources and successful exporting requires sustained commitment over time. History, unfortunately, is littered with half hearted and failed export attempts. Consequently, it is essential companies complete an honest and thorough assessment of their readiness before exporting. Ideally the company will possess a first class business concept that exhibits distinct [and preferably several] unique selling propositions. Overseas consumers, particularly those in other western countries, such as the US are rarely starved for choice. Consequently, care must be taken as an apparent niche may exist for a very good reason. A solid infrastructure, including solid operational and franchise management support systems and programs, will be required to assist management and support of existing domestic and new international operations. In addition, the business should have a solid domestic track record. Legitimacy is valued highly by prospective international franchisees. It is therefore important to have demonstrated a high level of domestic success. While the rewards for successful expansion are great, successful international franchisors will invariably require much greater financial and managerial investment, and time, than originally anticipated. Thus, business planning is crucial to ensure financial resources and management succession provisions are sufficient to invest properly in international development. A common misconception in international franchising and licensing is that a successful franchising program for one country can be readily applied to another – with great success. This is a strategy employed by some companies seeking rapid international growth. But this approach is incorrect. What works well in one country can be totally inappropriate for another – and even disastrous – as many experiences have shown. It is therefore necessary to research and adapt the franchising format from one country to ensure it is optimal for the target country. Depending on the target country there are a number of areas where the business and aligned franchising format require changes. Examples include the commercial structure for the international relationship, the structure for expansion within the target market, the basic business concept, including how it is run, the breadth of supporting services provided, optimal types and levels of franchise/license fees, to mention a few. Such adaptations are necessary from country to country due to numerous differences in areas such as local pricing, customer needs, preferences and buying habits, disposable income, demand size, industry structure, legal requirements etc. In addition, there are firm-specific factors such as growth targets, attitudes to risk, desire for control and available resources that also require consideration. Successful international franchising and licensing development takes considerable planning, involving business, franchising, legal and accounting specialists. Preparations involve multiple stages, from target country selection, business optimization, feasibility reviews, channel development planning, systemization to marketing. Overall, a well- planned and structured international franchising and licensing program has the potential to provide many successful domestic companies with an intelligent and efficient method to leverage returns from the intellectual property associated with their businesses.

What is franchising?

http://www.economist.com/node/14298990

Franchising

A system of marketing that enables firms to increase their turnover without increasing their assets

Oct 12th 2009

Franchising is a system of marketing that enables firms to increase their turnover without increasing their assets. Almost every type of business has been franchised at some time or other, from Big Apple Bagels to DreamMaker Baths & Kitchens. One of the best known franchises is the McDonald's chain of hamburger restaurants. Approximately 80% of McDonald's restaurant businesses around the world are owned and operated by franchisees.

Franchising involves two parties, the franchiser and the franchisee. The franchiser owns a trademark or brand, which he (or she) agrees to allow the franchisee to use for a fee (often an original purchase price plus a percentage of sales). The franchiser provides the franchisee with assistance (financial, choice of site, and so on) in setting up their operation, and then maintains continuing control over various aspects of the franchisee's business; for example, via the supply of products, discussion of their marketing plans and/or centralised staff training.

The franchisee buys into a proven business plan and considerable expertise. Other advantages to the franchisee include cost savings from the bulk buying capacity of a large operation, and the marketing benefits of central advertising and promotion of the business.

Many franchisees sign a franchise agreement believing it to be less risky than setting up a business on their own. But things can go badly wrong, even with well-known and well-established operations. Some franchisers have antagonised their franchisees by selling new franchises for sites close to existing operations. Many contracts now stipulate that franchises cannot be sold less than a certain distance apart, and in some American states there is legislation controlling their sale.

McDonald's says that its system is successful because:

[it is] built on the premise that the corporation should only make money from its franchisees' food sales, which avoids the potential conflicts of interest that exist in so many franchising operations [where fees are not tied so closely to sales]. All our franchisees are independent, full-time franchisees rather than conglomerates or passive investors.

 

McDonald's also says that it “remains committed to franchising as a predominant way of doing business”.

Elements of the idea of franchising have been in use for centuries. An article in McKinsey Quarterly (No. 1, 1998) says:

The 18th-century North West Company featured decentralised decision making, a franchise-like structure, and strong incentive systems, features that enabled it to overtake the entrenched Hudson's Bay Company despite its overwhelming structural advantages.

 

The recent growth in franchising has been fast. By 1999 the International Franchise Association reckoned that:

More than 540,000 franchise businesses dot the American landscape, generating more than $800 billion in sales. With a new franchise business opening somewhere in the US every 6.5 minutes each business day, franchising is indeed the success story of the 1990s.

 

Franchises can bring great wealth to both parties; but they can also be a disaster for both parties. A restaurant franchise in the UK called Pierre Victoire was started in 1987 by Pierre Levicky, a Frenchman living in Edinburgh. By 1996 there were over 100 Pierre Victoire outlets in the UK and Levicky was planning to float his business on the London stockmarket with a tentative valuation of £14m. But a number of problems (not least a lack of control over the franchise quality) led the receivers to be called in in 1998. Some of the franchisees took over the business; others had to abandon their restaurant's name. Levicky himself ended up as a chef in one of his former franchisee's restaurants.

Further reading
Bradach, J.L., “Franchise Organizations”, Harvard Business School Press, 1998
Norman, J., “What No One Ever Tells You About Franchising”, Kaplan Business, 2006
Shook, C., Shook, R.L. and Cherkasky, W.B., “Franchising: The Business Strategy That Changed the World”, Prentice Hall, 1993

More management ideas
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