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Sanjay Duggal makes the case for international franchisors to adopt foresight that rejects flawed convention, spawns a fresh approach and jives with the new normal.
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In the rarefied space at the top of the franchise food chain, a mere “opening soon” sign can turbo-charge leasing in the entire vicinity – almost anywhere in the world.
All the stars in the franchising galaxy don’t shine as bright though. In an industry worth almost $3trn a year, just a handful of brands wield true global power. Those that don’t, are an overwhelming majority.
Business 101 says that a franchise transaction involves one party paying fees and royalties to the other in return for a proven system, license, and ongoing support. The brand’s equity (or value) in the target market is pivotal to the relationship’s success, but isn’t quantified or even referred to in the franchise contract. This glaring irony tends to get buried deep under seemingly more important details – either by franchisor design, investor oversight or both.
Growing cross-border franchising misadventures
Increasingly in recent years, international franchise deals, particularly here in the Middle East, have been hit-or-miss. Most businesses have been strained by demographic, technological, behavioral, and economic shifts playing havoc with them in unison. And that was before the pandemic.
Current conditions necessitate that small and medium businesses thrive and proliferate to revive markets. Franchising could be central to this endeavor, but the regional industry – even though a rising force – remains largely in its nascency.
Economic restoration, therefore, lies in the effective reconciliation of opposing realities, i.e., the increased volatility of cross-border franchise investments on one hand, versus the need for more franchised businesses on the other. A careful big-picture review is essential to this endeavor and should be pursued as follows:
1. Revisit the fundamentals of franchising
a) The business methodology: As a system that facilitates the transfer of entire learning curves from one place to the other, franchising has created more livelihood opportunities in the past hundred years than any other form of business. Also, in a world where individual vocations were mostly determined by birth, background or education, franchising has singularly brought down entry barriers to every aspect of business.
b) The industry: Franchising as a sprawling industry of diverse businesses and their derivatives, and franchising as an instrument of business have become virtually synonymous. But they aren’t. Otherwise, a number of franchisor norms wouldn’t need to be remedied with urgency.
The practices of limiting financial transparency, inadequate franchisor accountability, myopic fee structures and misrepresentation of brand value to name a few, have entered the industry mainstream. To many, they represent the word “franchise” by default and dare one say, have even sullied its name.
It might be 2021, but the tail still shouldn’t wag the dog.
Conclusion: When viewed purely as a means to an end, franchising remains the business world’s equivalent of inventing the wheel. For entrepreneurs and consumers alike, it is a gift that keeps giving. But as an industry with global reach, it needs serious recalibration. This includes ridding itself of subtle but entrenched deceit.
2. Reexamine the role of brand equity in a franchise transaction
A key driver of franchise investments is the opportunity to partake in brand equity that facilitates enhanced performance and differentiates the business from rivals. Perception, loyalty, awareness, association and image are all different facets of brand equity.
It is also important that the following attributes of brand equity be acknowledged by both sides:
a) It’s difficult to measure: Barring a few select brands, there’s very little empirical evidence to back up claims made about brand equity, especially in the context of overseas territories.
b) It doesn’t always travel well: Even within the U.S., the home of franchising, there are many examples of brands with a major East Coast presence that are virtually unknown on the West Coast and vice-versa. Recognition tends to diminish that much more when international borders are crossed and barriers of language and culture are added to the mix.
c) It doesn’t necessarily correlate with size and revenue: In developing a fee structure, franchisors heading to new markets tend to compare themselves with brands of similar backgrounds and sizes. But a commitment to the new territory in terms of local infrastructure investment is a decidedly more accurate indicator of eventual brand value than plain size.
d) It should result in a sustainable price premium and increased demand over the competition: Ultimately these are the only two things that matter. But they are also the most difficult things to ascertain ahead of time, in the absence of reliable information.
e) In markets without pre-existing brand recognition, the franchisee actually pays the franchisor to boost brand equity: In spite of that, brand equity universally remains an asset retained only by the franchisor. Five and 10-year franchise contracts without a guarantee of renewal make sure of that.
Conclusion: The steep costs typically involved in acquiring and operating an international franchise can no longer be justified without demonstrable brand equity in the target market.
Taking a chance on a domestic franchise or developing an independent brand whose value can steadily appreciate is a decidedly better option today. And that’s precisely what trends demonstrate.
3. Redevise the approach to international franchising
a) Commit to co-creation: There are numerous examples of unique international brands of modest size that caught the keen eye of traveling investors. The result was massive brand expansion, global popularity, and a genuine win-win for both parties. More franchisors can make this happen by bringing an open mind to the table. Parting with equity and spinning off overseas operations are just two manifestations of that open mind.
b) Consider alternatives to traditional franchise agreements: The essential legal elements of a franchise are a trademark, fees and ongoing support. But options like license agreements without the obligation of continued support are feasible in certain industries.
Selling branded products but not operating under the banner of the franchisor is an option in others. One needn’t fixate on what it’s called but focus on what it does.
c) Rethink the notion of franchisability: The long-held belief that a franchisor should have operated multiple company-owned units for several years before franchising needn’t hold water in current market conditions. If the efficiency of a no-frills business model is of sole importance to an investor and can be translated to an agreement, there is no valid reason why a single unit owner cannot franchise.
d) Keep the franchise equation front and centre: Franchise proposition = Operating System + Brand Equity. Without measurable brand equity, a franchise is an incomplete investment proposition, especially in a foreign territory. What’s more, in introducing a new brand to a market, the financial stakes are typically much higher for the franchisee than the franchisor. The one-size-fits-all agreements that franchisors are generally shy to deviate from must be replaced by a dynamic document and adaptive mindset.
Conclusion: The rising problems in international franchise relationships emanate from claims and expectations that are misaligned with economic reality. In being candid about the value they do and more importantly, don’t represent, franchisors won’t feel the need to overstate their capacity. Moreover, in an environment where financial odds continue to stack up against importing a franchise, hustling like before only guarantees a lose-lose outcome.
There’ll be no going back to business as usual
Franchisors with international ambitions may view the “new normal” as just an overused expression born of a pandemic, or a recalibration opportunity for viable franchise relationships. Either way, it’s here to stay, especially in the Middle East.
Going forward, franchise thinking will need to extricate itself from the industry that perpetuated it. That means adopting foresight that rejects flawed convention, spawns a fresh approach and jives with the new normal.
Sanjay Duggal is the CEO of U.A.E.-based Stellar Eastern Franchising, which provides in-depth advisory on how to navigate the Middle East franchise industry
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