The biggest mistakes franchisors make when going international  | Global Franchise
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Friday 1st July, 2022

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The biggest mistakes franchisors make when going international 

Insight

The biggest mistakes franchisors make when going international 

Ultimately, most franchise brands want to dominate their domestic market and expand to foreign shores, but it’s a process that is replete with pitfalls and mistakes

Without international expansion, a franchise brand can never truly become a behemoth. While it’s entirely possible to grow a domestic franchise group or brand that produces revenues of $1bn plus, most brands will not sit satisfied with dominating their domestic market. As long as there are markets and customers to capture, businesses will continue to sail to new shores. 

Quite naturally, everything that makes up a brand and the processes that allow it produce a product or provide a service, are inevitably informed by the culture of the country it’s based in. Respecting a different country’s culture and way of doing business is essential to achieve any form of success. 

“There was an arrogant, implicit assumption in Dunkin’s expansion, that eating doughnuts and drinking coffee was universal: it isn’t”

Walmart sold its majority stake in Seiyu, a Japanese retail brand because Japanese consumers associate the constant messaging of ‘cheap prices’ with low quality. It’s difficult to understand from an insular perspective, but without localizing messaging and operations, brands can suffer nightmares abroad. 

No franchise can afford to take international expansion lightly, if a brand hasn’t put in lots of legwork to make it happen, something isn’t right. 

Lack of localization  

Different regions in the world have different business practices, tastes, working hours and even ideas of success. They will have evolved over hundreds of years, and is the culture in which a country’s business environment will be mired in. It is, therefore, essential for any foreign entrant into a market to make sure it is not sailing against the wind, and is making use of a country’s unique culture to further itself. 

While eBay is not a franchise, its failure to localize its processes meant that it had to completely abandon its presence in one of the world’s largest markets. In the western world, eBay users can make bids on a listed product and communicate with the seller via messaging.  

E-commerce platforms in China offer instant messaging (IM), because establishing social connections is essential to conducting business in Chinese culture. eBay had no way to establish social connections between buyers and sellers, and consequently, shut down within two years of entering the country. 

“Itsu is an amazing concept from London and when it came to New York City, it picked a horrible location that was three times larger than it should have been,” said Dan Rowe, founder and CEO of Fransmart, the restaurant development company behind brands such as Five Guys, Brooklyn Dumpling Shop and many more. 

“New Yorkers didn’t understand how to use the concept, customers didn’t feel smart and as a result, they didn’t go. That lack of localization and knowledge of the market crippled plans for North American expansion.” 

Establishing the right business culture and modifying services/products to local markets is a non-negotiable. Dunkin’ came to China in 1997 with ambitions of selling coffee and donuts to Beijing. There was an arrogant, implicit assumption in Dunkin’s expansion, that eating doughnuts and drinking coffee was universal: it isn’t. The brand made no effort to educate the market on its offering. Beijingers saw no reason to eat an extremely sugary dessert food for breakfast and all of the brand’s outlets closed within five years. 

“For F&B brands, localizing products is increasingly necessary to eliminate imports with tariffs and supply chain delays. For service brands, the business culture – how business is done in a country – has to be taken into account to ensure that local consumers will buy the brand’s offerings,” said Bill Edwards, founder and CEO of Edwards Global Services, an international franchise developer for U.S. brands. 

Dunkin’ has since successfully re-entered the Chinese market after undertaking research and consulting with local firms and people. 

Lack of talent 

Securing the right talent is the foundation of a successful business. Without committed, intelligent and quick-footed staff, a business has nothing. When Roll’d Vietnamese was looking to expand into the U.S. from its Australian base, it took employees with it.  

“Our overall objective is to build a local team, however in the initial stages our plan is to send an ‘A-team’ from key management to team members from various departments to set up, train and build our Roll’d culture – which we see as essential to our success,” said Bao Hoang, co-founder and CEO of Roll’d Vietnamese. 

“Some franchisors don’t engineer unit economics strongly enough so that franchisees are making sufficient revenue that they want to keep reinvesting in more locations”

This may be the single biggest barrier to international expansion, as evidenced by a 2020 report from the Global Payroll Management Institute (GPMI), 71 per cent of the 1,000 human resources (HR) professionals surveyed indicated that HR issues are amongst the most challenging barriers to international expansion. 

“The shortage of unit management talent is a global reality today,” said Edwards. 

“When analyzing whether a local company can be your licensee, you must find out if they have access to management talent. This has actually been a challenge for many years.” 

Master franchising is the primary form of international growth for many brands, so searching for the right master franchisee is key to success. Brands need to pick experienced and talented individuals who have demonstrated an ability to grow a brand, preferably within franchising.  

Picking the wrong master franchisee, in the worst scenarios, can lead to that entire market being permanently shut off from a brand. 

Lack of readiness 

International growth is very much something every brand would like to do. Opening and successfully operating in foreign markets is a vindication both of the business and its leaders, who at times, may engage in international expansion to satiate their own ego and earn franchise fees. 

“Some franchisors don’t engineer unit economics strongly enough so that franchisees are making sufficient revenue that they want to keep reinvesting in more locations,” said Rowe. 

“Instead, mistakes are made and franchisees lose focus and eventually, interest. Franchisors should stay actively engaged with the franchisee for the first year or two as if it were a corporate market. Many franchisors just want the franchise fee and to plant a flag. 

“I hear stories all the time of franchisors selling another country and they don’t even bother visiting the market for proper real estate diligence, meetings with suppliers, and generally assessing the viability of the market.” 

The strength of a franchise beyond the brand itself, is the quality of its operations and the soundness of its unit economics. In terms of operations, what makes a franchise a franchise, is that franchisees have an operations and standards manual to refer to that has been designed to keep costs as low as possible, and profits as high as possible. 

Those processes must be easily translatable into a new market, with no significant impact on costs and profits. Franchisors shouldn’t be led by inquiries from abroad, a well-thought-out strategy is likely to lead to better results. 

“I have had franchises with five units come to me for help going global because they have received internet leads who want to buy their brand,” said Edwards. 

“Without an established and proven operations manual and unit economics, a franchise will fail when trying to go global.” 

Brands cannot jump on a lead and see that as a ticket into that country, validating the opportunity is an essential step.  

International expansion is no walk in the park 

The franchise community does a great job of promoting the success stories of brands that have gone global, but less so with brands that have failed. It’s important to note that many do fail in their expansion, or at least take a step back and planned more thoroughly. But it’s not an impossible process; many brands have successfully expanded around the globe, and learning from them is key. 

“Find other franchisors who have done it successfully and ask for help,” said Rowe. 

“It’s essential to work with experienced consultants and having the ability to say no to the wrong franchise group. Whatever cost and time you think it will take, it’s diligent to assume that it’ll take double to get ahead of any unexpected costs, even if that doesn’t turn out to be the case. 

“Finally, make sure you are committed to your franchisees’ success. Without their continual success, there is no chance your brand can establish itself in a foreign market.” 

Costly expansions can debilitate a business, and create a negative image in a market before the brand has even truly established itself. Preparation is all-important; and making sure a product or service is localized and priced appropriately is key, alongside finding the best talent and picking the right master franchisee to grow the brand. 

While each market is different, successfully expanding into the first foreign territory will give a brand a strong blueprint from which it can plot its course into more countries and regions. 

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