Europe is the world’s second-largest economy after the United States, with an estimated GDP of $18 trillion (in nominal terms), which represents about 23 percent of the world’s economy. The average Gross Domestic Product (GDP) growth rate in the European Union for the second quarter of 2019 dropped to 1.3 percent, mostly due to geopolitical disruptions of international trade flows, and uncertainties created by Brexit and the COVID pandemic, resulting in reduced levels of manufacturing activity and new business investment.
The good news: Despite the challenges of global political and economic issues, positive factors across the European continent include: lower unemployment levels and increasing wages; growing domestic demand; rising retail sales; and increased government spending and investment.
International franchise concepts continue to be very popular options for European consumers, and the strong purchasing power of the region enables the successful entry of new brands into this territory with huge market potential.
Could you be the person responsible for exporting America’s next big franchise brand to Europe and satisfying pent-up demand? Perhaps you could be the business leader that starts Chick-Fil-A Europe, for example. Read on to find out how you can navigate the European franchising landscape.
Franchising advice: Five things to consider before launching your brand in Europe
1. Utilize market intelligence
A potential franchisor needs to understand key factors in target markets (economic statistics, political environment, European population, rule of law, demographics, national regulation, labor laws, intellectual property rights, for example.); as well as understanding the cultural differences, which is a critical element for success.
It is not sufficient to only surf the internet for statistics or read a book about the different European countries; a franchisor also needs to utilize in-country resources to obtain that capability. Such resources include professional contacts based in the target markets who can provide guidance and orientation about the market characteristics and cultural nuances, as well as assisting in the identification of qualified investor prospects to ensure you have a strong approach to franchise agreements in your targeted territory.
2. Be aware of time and resource commitments
Regardless of whether you’re specializing in hotel franchising or you’re a boutique fitness franchisor, in order to successfully develop franchise opportunities in European markets, a franchisor must devote the necessary financial and human resources over a sufficient time period.
The franchise sector is mature in the European market, and investors are more sophisticated with a higher level of expectations. The process of identifying and developing qualified candidates is time-intensive, and it is necessary to devote sufficient time to develop a level of mutual confidence. A one-size-fits-all strategy just won’t suffice when looking for skilled, relevant, master franchisees.
An investor candidate needs to be assured that the franchisor is making a long-term commitment to the new business, and the franchisor needs confidence that the candidate is qualified and will be dedicated to successfully developing the brand over time.
3. Be flexible in your franchise strategy
In the past, American franchisors were able to set the terms for the acquisition of their brand’s license by international investors, without having to make many adjustments. In today’s global market, it is necessary to work with the local investor to design a development plan and business strategy in order to agree on adjustments in terms that also meet the investor’s business objectives and realities of the market.
This is critical, especially in establishing operations and franchised properties in the first market in Europe. The precedent of a successful operation in the region is a major advantage when a franchisor is promoting their brand in Europe.
Going the extra mile to get a deal done is well worth the investment, which may sometimes require just getting on a plane to the target market and meeting personally with the candidate over a period of days to achieve a master franchisee agreement (possibly multiple times).
4. Find the licensee in the internal market
This is the most critical element of the international development process and it is the most common reason for the failure of an international operation, as well as for its success. There are a variety of resources available to try and identify a qualified master franchisee, as well as to perform background checks and confirm the reputation and reliability of the prospect.
The right partner will be able to adapt elements of the franchisor’s brand in order to enable acceptance by the local population, while also maintaining the integrity of the brand. It is critical that the franchise brand find a licensee who fits their profile of successful licensees elsewhere in the world, in order to help them to go on and secure agreements with franchisees.
5. Offer operational support for your franchising business
Once franchise arrangements and agreements are signed, the challenge is to then provide the needed operational training and support to maximize the probability of success for the local licensee – from the initial start-up training and operational audits to solving minor problems before they become a crisis that can threaten the survival of the business or damage the brand.
It is estimated that 40 per cent or more of the units scheduled to be opened in countries by licensees never get opened, partly due to the level of training and ongoing support provided to the licensee by the franchisor. Factor this into your additional franchise cost and seek out advice from franchise specialists who know the business model and territory. If you are looking to recruit a Spanish franchisee, for instance, then you need to source specialists who have in-depth experience working in the Spanish franchise market.
Once you have made your franchise proposition appealing to overseas investors, you should find franchise candidates ready to take your franchise opportunity to their native market. For instance, The Avocado Show has recently signed an agreement to open 19 new locations across Europe, the likes of iHop and Hooters are looking to grow their European networks, Marugame Udon is opening its inaugural European restaurant, and Gong Cha is targeting aggressive European growth, to name just a few brands that are successfully tapping into local demand and sourcing investors in their target markets.
Three ways to grow your franchise network in Europe
1. Spark active discussions in the target markets
When trying to break into a new market, business leaders must find as many ways as possible to get in front of the international market’s prospective investors. This means investing in marketing and advertising efforts that are specifically geared toward the primary demographic in the country they’re targeting for development, in order to get prospective investors submitting a franchise enquiry. Challenges for franchisors looking for great candidates usually involve a lack of awareness of the franchise opportunity itself.
To effectively convey a franchise development message to the right audience of potential Spanish franchisee investors, for example, the lead generation stage must begin with the launch of a Spanish-language website. Soon after the website goes live, the brand must launch a paid social media campaign with targeted ads featuring their franchise’s branding and messaging, in Spanish, promoting the top benefits of the master franchise ownership opportunity and the commercial formula you have devised.
2. Hire a consultant based in the target country
In order to facilitate communication even further beyond our targeted digital outreach, a consultant with local knowledge as well as fluency in that language and English is a huge help. Hiring consultants can be extremely helpful as they serve as the liaisons who keep the conversation going between a franchisor and its international prospects past the initial lead generation, beyond just taking an investor’s email address and hoping for the best.
Due to the large geographical area and difference in time zones from the franchisor to the foreign country, consultants can field calls and answer questions from potential partners more efficiently.
To run a successful franchise business model in Europe, hiring and collaborating with consultants can not only help to bring in new business, but it also ensures that the process from inquiry to signing is as efficient as possible.
3. Join national franchise associations and start networking
Regardless of the industry or sector your franchise business model belongs to, finding a relevant association that targets your ideal franchise prospects in international markets can help you connect with qualified, targeted leads quicker than you would on your own. Association memberships also provide the opportunity for peer collaboration with others in your industry who may be more familiar with the international market.
Top franchise-friendly European countries
Despite its comparatively small surface area when positioned next to the rest of Europe, the U.K. has a surprisingly deep and intricate relationship with franchising. Both domestic and international franchising brands have managed to thrive in Blighty, and as a result, the country’s youth are hopping on board the franchising train: currently, around 18 per cent of franchisees in the U.K. are under the age of 30.
If you’re looking for a vibrant international market where innovation is being driven by up-and-coming entrepreneurs, and the native English-speaking consumers present zero language barrier for most Western franchise concepts, then this could be the ideal country for European expansion.
According to a 2018 study by the British Franchise Association (bfa), franchising contributes more than $21.5bn to the U.K. economy and employs over 710,000 people.
In fact, over half of franchisees in the U.K. declare an average annual turnover of over £250,000 (around $312,740), and the franchise industry’s overall revenue has grown by almost 50 per cent over the last decade.
For proven concepts that generate sustainable revenue, the potential for rapid growth is likely, as 35 per cent of savvy franchisees in the U.K. currently run multiple units; a seven per cent increase since the survey was last conducted in 2015. The United Kingdom’s franchising demographic is also a rich and diverse one, with 65 per cent of people employed within the industry being female.
The most common approach international brands have when franchising in the U.K. is with a straightforward master licensing agreement: “The majority of large international brands operating in the U.K. do so with a strong master licensee,” says Emily Price, chief operating officer of the bfa. “We see this working best when the international franchisor has an open mind to be flexible and amenable to regionalizing the model.”
That being said, testing the waters is always encouraged: “We would strongly recommend, regardless of the style of franchising, that a U.K. pilot is run and remains as a testbed for developments,” continues Price.
Incoming businesses may still be apprehensive about the potential impact that Brexit will have on franchising in the U.K., but the general consensus is that the separation from the EU is unlikely to affect the laws that impact franchisors within the country, despite the fact that most of the U.K.’s laws are based on those of European Union members.
As always, international brands should conduct thorough research into the specific factors that affect them in this unregulated market, and perhaps consult with the bfa for specialized information when it comes to their approach to franchising: “The bfa often speaks with international franchisors in their due diligence stages for the U.K.,” says Price. “The bfa’s code of ethics and standards provide a fantastic guide for what an ethical business format franchise model should look like.”
Renowned as having a rich cultural tradition and for producing some of the world’s most beloved artists, France is also the European hub for franchising, on account of the country’s strong economy and its unfaltering embrace of the business model.
France’s history with franchising stretches back many decades, with the French Franchise Federation being founded in 1971 to advocate for sustainable, healthy development within the industry. The franchise industry almost doubled in recent years, with the 1,228 franchises existing in the country in 2008 growing to 2,004 by 2018.
The French franchise industry has naturally grown financially, to now represent revenues of around $69.94bn, and employ over 700,000 people, both directly and indirectly. French franchises make up the majority of the market, with only seven per cent of businesses in the country originating from abroad. Of that minority, the U.S. has the highest slice of the French market, representing 22 per cent of international brands within the country.
In fact, McDonald’s – one of the most recognizable American franchise brands – has found France an especially rewarding market. With over 1,200 French locations, France is McDonald’s’ largest market outside of the States. Likewise, Domino’s Pizza runs around 431 franchise units in France.
France also has a very high hourly labor cost of €36, compared to €35 in Germany and €27 in the U.K. This sometimes means that food franchises close from 2pm until 7pm, to avoid paying wages during relative downtime.
Then there’s Doubin Law that franchisors must comply with, which states that disclosure must be provided by the franchisor at least 20 days prior to the signing of any documents or payment of any funds. Failure to comply with this law can result in a franchise contract becoming void, and will require the franchisor to compensate the franchisee for any fees incurred.
Approached correctly, France can be a hugely successful market for any franchise brand. The most common method of franchising from an international perspective is a single, national master franchise agreement, because while the country may be more than double the size of somewhere like the U.K., the French railway network allows for seamless logistics.
Italian franchising actually has a very specific birthday, according to the Italian Franchise Association. On September 18, 1970, a large-scale distribution company, the ‘Gamma di’, launched 55 stores throughout Italy, which were to be managed by a dozen affiliates. Thus, franchising was brought to Italy’s shores and has since grown into a thriving industry providing employment, profits, and exponential success.
To date, the Italian franchise market is worth around $32.5bn, which is a 17 per cent increase across the past decade. Across this same period, foreign investment in Italy through franchising has increased by as much as 35.8 per cent. It’s undoubtedly an industry on the rise.
Domestic brands still occupy a large majority of the market, however, and of the 961 franchise networks that existed in Italy in 2018, 861 were of Italian origin. This figure positions Italy as the fourth largest franchise market in Europe, following Spain, Germany, and France.
Most of Italy’s franchise networks can be found in the wealthier north, and franchise locations are primarily situated in city centers and shopping malls, typically in large cities such as Rome or Milan.
The Lombardy region of Italy, located in the northwest, brings in most of Italy’s total franchise turnover at 16.5 per cent.
Franchisors shouldn’t exclusively aim for cultural hotspots like Rome, as Italy has a thriving middle-class demographic that support sophisticated goods and services all over the country. This ensures the success of savvy businesses in smaller cities that have showcased exemplary adaptability and adapted to current market trends, with stores in airports or train stations being just as viable as the usual high street and shopping mall locations.
The Italian franchise market is diverse in several senses of the word; service franchises are the most common at 25 per cent of businesses, with food brands only making up 18 per cent. However, in 2016, the food segment brought in revenue of more than $9bn, which represented 32.2 per cent of the total annual turnover for that year.
The market is also considerably youthful. Almost 90 per cent of franchisees in the country are aged between 25 and 45 years old, according to the Italian Franchise Association, and low investment costs are one of the key motivators behind Italy’s continual growth: 34.3 per cent of investments don’t exceed €20,000, which equates to around $22,794, making franchising more approachable than ever.
“Franchising is confirmed as an increasingly growing and attractive sector, even for the youngest who are entering the world of work for the first time,” says Augusto Bandera, secretary general for the Italian Franchise Association. “The growing demand and the emergence of new formats are a symptom of a system that works and inspires confidence thanks to the reduced business risk.”
While franchising was only introduced to Turkey when McDonald’s opened its first Istanbul location in 1985, you’d be forgiven for thinking the business model has always been a part of the country’s infrastructure. An exponential rise in the popularity of Turkish franchising, both for international as well as domestic brands, has positioned this country as a surprising frontrunner when it comes to European development and beyond. In fact, its close proximity to the Middle East prompts many people to ask: ‘Is Turkey in Europe?’.
There are undoubtedly some key cultural differences that franchises must consider, such as 99.8 per cent of the country being of Muslim faith, but this hasn’t stopped some of the biggest Western names finding immeasurable success within Turkey.
Burger King, for example, opened its first Turkish restaurant in 1995, and now has more than 600 locations throughout the region. This surpasses even the golden arches themselves, with McDonald’s currently operating around 200 locations in this dense, vibrant economy.
According to the Turkish Franchise Association (UFRAD), there are approximately 3,000 different franchise brands currently operating within the country – 36 per cent of which are of international origin. On the opposite end of the spectrum, around 120 Turkish brands have managed to thrive well enough within their home market to expand internationally.
From 2013-2018 the number of franchisors in Turkey tripled, helped in no small part by the $180bn in foreign investment Turkey has received over the last 15 years. Franchising brings in around $43bn for the country, with the city of Istanbul being the focal point for much of this activity.
“As well as being the most populous and busiest city in Turkey, Istanbul is the center of all national and regional trade and distribution channels,” explains Özhan Erem, founder of EREM Media Group, and organizer of Istanbul’s Be My Franchise Expo franchise event. “In addition, Istanbul welcomes millions of tourists every year as well as a significant number of visitors, not only for holidays but also for exhibitions and symposiums of various topics.”
The upward trajectory of Turkey’s franchise industry is one of the main appeals for international franchisors, and positions the country as one-to-watch for burgeoning franchisors as we enter a new decade for business development.
The GDP per capita for the country, for example, has more than tripled over the past decade and now sits at around $15,200. The country’s population, meanwhile, is staggeringly young, with over half of Turkey being under the age of 30.