While international franchise brands continue to be popular options for European consumers, there’s an array of key factors you need to consider before you take the plunge
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, 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 region include: lower unemployment levels and increasing wages; growing domestic demand; rising retail sales; and increased government spending and investment. International franchise brands 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 the market.
5 factors for success in the European market:
1) MARKET INTELLIGENCE
A franchisor needs to understand key factors in target markets (economic statistics, political environment, rule of law, demographics, franchise regulations, labor laws, etc.); 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 a country, 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.
2) COMMITMENT OF TIME AND RESOURCES
In order to successfully develop 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. 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.
In the past international brands 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 (and especially in more mature markets such as Europe), it is necessary to work with the local investor to design a development plan and agree on adjustments in the terms that also meet the investor’s business objectives and realities of the market.
This is critical, especially in establishing operations 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, as the saying goes “success breeds success.” Going the extra mile to get a deal done is well worth the investment, which may require sometimes just getting on a plane to the target market and meeting personally with the candidate over a period of days to achieve an agreement (possibly multiple times). Emails and phone calls only go so far, in this region the personal relationship is a priority. The franchisor needs to be willing to consider alternative arrangements in order to achieve success.
4) FINDING THE LICENSEE
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 qualified investors, 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.
5) OPERATIONAL SUPPORT
Once an agreement is 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; to regular visits 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 percent or more of the units scheduled to be opened in counties by licensees never get opened, partly due to the level of training and ongoing support provided to the licensee by the franchisor.
Profile of the typical European consumer: Today’s consumer in this region is generally well educated and well informed, with high expectations of quality and innovation in regards to the goods and services they purchase. They are frequent users of social media and are open to new trends and consumer options, with a broad acceptance of international brands.
Note: Due to the instant news updates available on social media, a franchisor (and their local licensee) need to have a system in place to immediately address any issues that may arise in regards to their product or services, in order to maintain their credibility in the market. The consumer will make rapid changes in their purchasing decisions.
Profile of the typical European investor: The average franchise investor candidate probably has a broad business background of success, is well educated and has strong ties with the local business community. They will perform significant analysis of the business fundamentals before investing in a new project and will want the franchisor to have some type of “skin in the game” – demonstration of an in-depth commitment to the success of the new licensee, including providing the necessary ongoing support to maximize the probability for long-term success.
Note: Even with the “right partner” a licensee may fail if they don’t have the in-depth support of the franchisor in regards to the start-up, initial development, and long-term operation of the brand in the local market. It is critical for the franchisor to make regular visits and to be well informed about the operations of the business, in order to avoid rude surprises that can either result in anemic development or even a complete failure of the venture.
ABOUT THE AUTHOR
Robert Jones is the chief international officer of Edwards Global Services. Previous to that, he was a commercial officer for the U.S. Government for 22 years, last serving in Spain as the U.S. Commercial counselor for Southern Europe.