Andrew J. Sherman offers strategies for penetrating the US market as an overseas franchisor
Just as the overwhelming popularity of franchising has captured the excitement of United States economy over the past forty years, it has also attracted genuine attention from the overseas markets over the past twenty-five years and this is likely to be a major trend in the future. Overseas franchisors bringing their branded products to the United States face an already receptive consumer market. The established fascination and U.S. customers’ curiosity with overseas products and lifestyles, can often pave the way for successful business operations and a high profile launch.
Don’t be a square peg in a round hole
Each franchisor considering global expansion and U.S. market penetration should assess the viability of the overseas franchising business model. Be sure to include variables relevant to the success of your particular franchising system and your underlying products and services. Be sensitive to potential variations in size, price, consuming patterns, frequency of consumption, competitive analysis, etc. Your willingness to invest meaningful time and resources into an international expansion program will ultimately define success.
When embarking on an international expansion program, overseas franchisors considering the United States must always consider:
Although it may seem simple enough at the outset to translate the Operations Manual into the local language, marketing the system and the product may present unforeseen difficulties if the concept itself does not translate well. The local country’s standards for humor, accepted puns or jargon or even subtle gestures may not be the same as your domestic country’s norms or idioms.
These factors should be carefully reviewed with the assistance of local marketing personnel and product development specialists before undertaking any negotiations with suppliers and distributors. The challenge is how to modify the particulars without losing the essence of the core product or service.
These types of barriers most frequently go to the deepest cultural levels. For example, whereas many overseas markets have developed a taste for burgers and hot dogs, differences in culture may dictate that the speed aspect is less important. Many cultures demand the leisure to be able to relax on the premises after eating a meal rather than taking a meal to go.
Domestic legislation may not be conducive to the establishment of franchise and distributorship arrangements. Tax laws, customs laws, import restrictions, corporate organization and agency/liability laws may all prove to be significant stumbling blocks.
Access to raw materials and human resources
Not all countries offer the same levels of access to critical raw materials and skilled labor that may be needed to operate the underlying franchised business.
The foreign government may or may not be receptive to foreign investment in general or to franchising in particular. A given country’s past history of expropriation, government restrictions and limitations on currency repatriation may all prove to be decisive factors in determining whether the cost of market penetration is worth the benefits to be derived.
Choice of Territory
A territory overseas may consist of a major city, an entire country or even a geographic region encompassing several countries. The chosen territory may well affect sales, distribution and the ability to expand at a later point in time.
Intellectual Property and Quality Control Concerns
Protection of trademarks, trade names and service marks are vital for the domestic franchisor’s licensing of intellectual property overseas. The physical distance between the franchisor’s domestic headquarters and the overseas franchisee will make the protection of intellectual property and the monitoring of quality control more difficult.
Domestic legislation needs to be examined as well for issues arising under labor law, immigration law, customs law, tax law, agency law, and other producer/distributor liability provisions. The need for import licenses and work permits will also need to be considered.
The forum and governing law for the resolution of disputes must be chosen. On an international level, these issues become hotly negotiated due to the inconvenience and expense to the party who must come to the other’s forum.
Use of a Local Liaison
It is critical for the domestic franchisor to have a local liaison or representative in each foreign market. This local agent can assist the franchisor in understanding cultural differences, interpreting translational problems, understanding local laws/regulations, and in explaining the differences in protocol, etiquette and custom.
7 Commandments for Developing an International Franchising Strategy
Know Thy Strengths And Weaknesses
Before expanding to another country, be sure to have a secure domestic foundation from which the international program can be launched. Make sure that adequate capital, resources, personnel, support systems and training programs are in place to assist your franchisees abroad.
Know Thy Targeted Market
Going into a new market blindly can be costly and lead to disputes. Market studies and research should be conducted to measure market demand and competition for your company’s products and services. Gather data on: economic trends; political stability, currency exchange rates; religious considerations; dietary customers and restrictions; lifestyle issues; foreign investment and approval procedures; restrictions on termination and non-renewal (where applicable); regulatory requirements; access to resources and raw materials; availability of transportation and communication channels; labor and employment laws, technology transfer regulations; language and cultural differences; access to affordable capital and suitable sites for the development of units; governmental assistance programs; customs laws and import restrictions; tax laws and applicable treaties; repatriation and immigration laws; trademark registration requirements, availability and protection policies; the costs and methods for dispute resolution; agency laws, and availability of appropriate media for marketing efforts.
Know Thy Partner
Experienced international franchising executives around the world will tell you that the ultimate success or failure of the program will depend on finding the right partner. Regardless of the specific legal structure selected for international expansion into a particular market , the master developer or subfranchisor in the local market should always be philosophically and strategically viewed as your “partner.” There is no substitute for face-to-face negotiations between parties, regardless of whether this individual is interested in a master development agreement or a single-unit franchise.
Know Thy Value
Many franchisors entering overseas markets for the first time have grandiose ideas about the structure of the master license fee and the sharing of single-unit fees and royalties. Reality and patience are the two key buzzwords here. If you overprice, you’ll scare away qualified candidates and/or leave your partner with insufficient capital to develop the market. If you underprice, you’ll be lacking the resources and incentive to provide quality training and ongoing support. The fee structure should fairly and realistically reflect the division of responsibility between you and your partner.
Know Thy Trademark
As a general matter, trademark laws and rights are based on actual (or a bona fide intent to) use in a given country. Unlike international copyright laws, your properly-registered domestic trademark does not automatically confer any trademark rights in other countries. Be sure to take steps to ensure the availability and registration of your trademarks in all three targeted markets. Also be sure that your trademark translates effectively in the targeted country and native language.
Know Thy Product and Service
The format of your proprietary products or services which have been successful in your home country may or may not be successful in another country. Be sensitive to different tastes, cultures, norms, traditions, trends and habits within a country before making final decisions on prices, sizes or other characteristics of your products or services. Conversely, be careful not to make drastic changes to your product or service at the cost of sacrificing quality, integrity, uniformity or consistency.
Know Thy Resources
Access to resources and experienced advice is a major factor in the success of an international franchising program but does not always require the help of expensive advisors or market research studies. In addition to the extensive resources available at the International Franchise Association in Washington, D.C. (202‑628‑8000), over thirty different countries have established national and regional franchise associations which may be an excellent starting point for gathering data about a targeted market.
Know Thy Rationale
Franchisors often have widely varying reasons for selecting a targeted country or market. Sometimes they are “pulled” into a market by an interested prospect who is familiar with their concept (often as a result of being a temporary resident, tourist or student in the franchisor’s home country), which is especially dangerous if the franchisor relies only on the assurances of the interested candidate that there is a demand for products and services.
ABOUT THE AUTHOR
Andrew J. Sherman (@AndrewJSherman) is a partner and Chair of the Corporate Department in the Washington, D.C. office of Seyfarth Shaw, and a top-rated Adjunct Professor in the MBA and Executive MBA programs at the University of Maryland and at Georgetown University Law Center. He is the author of several books, including Harvesting Intangible Assets, Franchising & Licensing and his latest released January 2017, The Crisis of Disengagement.