Franchising overseas can be a great option for businesses in a country with a limited home market, such as ours. Domini Stuart looks at what it takes to get ready, and how some successful working models took the international leap.
Of the 6.6 billion people in the world, around 20 million live in Australia and so it’s not surprising that many Australian franchisors are taking their business overseas.
According to Deakin University’s Franchising Australia 2006, by last year around a quarter of our 960 systems were franchising internationally. Most had made their first move within the past five years. And the fact that they had an average home base of just 29 franchised units suggests that the carrot of expansion rather than the stick of a saturated home market is driving the trend.
Nevertheless, experts caution against being swept along by the crowd. “You need to be ready,” says Cheryl Scott, Austrade’s industry specialist in franchising and business services. “And you need to be looking overseas for sound business reasons—not because everyone else is doing it, not to satisfy your ego, and not because you’ve had an unsolicited approach from someone overseas.”
“If you do receive an international inquiry, the important thing is to ask yourself what is your overall international plan,” says Adrian McFedries, managing director of franchising specialist, DC Strategy. “Before charging down the reactive path in the hope of securing an international deal, think through what you would expect from an international partner if you were seeking to bring a business into Australia.”
Scott recommends allowing two or three years for research and planning, and making sure your domestic operation is sound before venturing overseas. “International expansion should be kept quite separate from domestic operations,” she says. “You need dedicated people with time and money to do the research, travel to trade shows and talk to experts on the ground. You certainly shouldn’t think about going overseas to address problems you have here, such as poor cash flow.”
It pays to get the right legal and financial framework in place from the start, and you also need to protect the intellectual property associated with your brand.
“It would be heartbreaking to display your franchise at an expo one year, then return the following year to find someone else doing the same thing under the same name,” says Richard Evans, (former) CEO of the Franchise Council of Australia. “It sounds unlikely, but it could easily happen.”
In many cases, Austrade is the first port of call for would-be exporters. “Austrade is essentially a marketing agency,” says Scott. “We have the imprimatur of the Australian Government, and we’re impartial. Our research centre in Australia provides access to reference materials like IBISworld and the Economist Intelligence Unit—resources which can be very expensive for the individual. We have colleagues on the ground in some 130 overseas locations filling in the gaps. And we have access to local experts to help with regulations and accounting practices, as well as advising on the appropriate business structure.”
While a franchised operation can take the form of any other enterprise, McFedries cautions against copying another group’s model or being heavily influenced by legal opinion. “Every business is different, and even the most common model, the master franchise, has significant variety,” he says.
“The master franchise option is popular because you don’t have to commit any capital,” says Scott. “But it’s fraught with danger unless you choose someone you can trust with your brand because you relinquish a lot of control.”
Scott believes that, if you have capital to invest, a wholly owned subsidiary could carry the greatest chance of success.
“When Bakers Delight moved into Canada, they started by sending some of their top management team and developing a network of around 30 company-owned stores,” says Scott. “They wanted to be sure they had a good footprint and the correct model before they started franchising there. As they had trained all their managers, they also had a group of appropriate people to sell the franchises to.”
Other options include joint ventures, area development arrangements, hybrid models and models which change over time. “It’s dynamic, and that’s as it should be,” says Scott. “People can apply the benefits of different models depending on what they want at the time.”
When it comes to finding a business partner, experts suggest visiting franchise trade shows and possibly appointing a broker and advertising in financial papers. “Austrade can help with all of these approaches,” says Scott. “We have the advantage of knowing what works where. In Scandinavia, for example, advertising is not considered professional. If you’re not aware of a detail like that you could waste a lot of time and money.”
Just Cuts specialises in cutting hair, no appointment needed. They opened their first salon in 1983, began franchising in 1990 and now have around 150 outlets in Australia and 21 in New Zealand. They are also in the process of opening salons in India.
“New Zealand is so close it was a natural first step,” says business development manager, Grant Geraghty. “We exhibited at a franchising expo in order to generate interest from potential master franchisors, and we were lucky enough to find one who fitted right in. It’s not all about dollars, it’s about finding someone with the fire in their belly to make these things work.”
Next they looked at Canada and the US but found that a number of large and successful groups were already offering a similar service. In India there was no-one bridging the gap between a barber’s shop and an expensive salon.
“We chose a large organisation, Gitanjali Lifestyle Group, as master franchisor for the region,” says Geraghty. “The Group already has a database of franchisees who are ready to go, and they plan to have at least 250 salons open within five years. Then, once India is up and running, they will roll the brand out to Sri Lanka and Bangladesh.”
It’s barely more than a year since CEO, Denis McFadden, made his first trip to India with Austrade. “It all just fell into place after that,” says Geraghty. “Austrade says it’s the fastest deal in their history!”
Since opening the first franchised store in1998, Howards Storage World has expanded across Australia and into the Middle East, Singapore, Malaysia, Spain, the Philippines, and Ireland.
“We use exactly the same master franchise model in Australia and overseas,” says CEO, Dirk Spence. “People buy the rights to a country or territory and then we insist that they open at least one company store before sub-franchising. Some open nothing but company stores. Either way, they must also have a wholesale warehouse for importing the goods we manufacture under our own brand and distributing them to the network of Howards Storage World stores.”
While planning is vital, Spence doesn’t believe it’s possible to plan for specifics.
“Where we go can depend on where a suitable master franchisee contact comes from,” he says. “Yes, I’ve done my homework and Europe looks strong, but someone from Brazil could knock on my door tomorrow and might be the best master franchisee you could hope to find.”
The ideal business partner could also come from a number of different backgrounds.
“I’m talking to people from Poland at the moment who have a large wholesale distribution company and are wanting to diversify into retail,” says Spence.
“Then we have people in Ireland who were merchant bankers. They’re effectively starting from scratch but they have the ability, and they understand the need to build a management structure for the business. Most importantly, you must have the passion and the belief to make it work.”
Howards Storage World master franchisees are responsible for all financial and legal matters. “We give them a draft international agreement and it’s then their responsibility to make any adjustments to comply with local law,” says Spence.
It’s also up to them to decide whether they can make the concept work in their market.
“Of course we have a sense of whether a market has potential,” says Spence. “We also give potential master franchisees with a serious interest complete information on all operational, marketing, and historical trading results from Australia and around the world. We can tell them what population base you need, the demographic we attract and so on, but then it’s up to them to do their own business plan. If someone asks me ‘do you think it will work in my market?’ I say ‘I don’t know—you must do your business plan and homework and then you tell me’.”
Stephen Giles, a partner at DC Strategy, recommends the following six-step development plan.
Assess your export readiness. Look at your local success, your commitment to overseas expansion and whether you have the experience and credibility to tackle international markets.
Research potential markets.
Establish the necessary infrastructure including protecting your intellectual property, getting advice on the various laws which will apply to your business, establishing your business model and setting down the qualities you need to look for in a partner.
Start planning, testing, and establishing a pricing structure.
Establish local partner relationships.
Work cooperatively to ensure local market success.