For many emerging franchisors, success at home brings thoughts about opportunities worldwide, but there are myriad crucial factors to consider first.
For weeks you’d been planning your franchise development trip to Australia and you were fairly certain you’d return home with a large deposit from your newest master franchisee. For months you had studied the Australian market and you knew that your concept was a perfect fit.
With the assistance of the International Franchise Association (IFA), the sponsor of your trip, which included a dozen other franchisors, and the U.S. Department of Commerce, you had set up five appointments with prospective master franchisees. All of them looked good, but one, in particular, was the frontrunner because he actually had experience in your industry. You had communicated with him on several occasions and based on the correspondence you had a reasonably good hunch that he would become your master franchisee for “the land Down Under.”
You scheduled the frontrunner for your first meeting upon arrival in Sydney. You were all set with a slide presentation, good handouts, and an invitation for your favorite candidate to visit your headquarters in the U.S.A. in the coming weeks, where you would both sign the master franchise agreement with fanfare. The excitement mounted all the more because you intended to sell the rights to Australia for $500,000, and if things went well you would likely return to the U.S.A. with a $50,000 deposit.
“In the 1990s ‘bad-faith trademark filings’ or ‘trademark squatting’ was not unusual in Australia and other countries around the world”
So imagine your surprise when you sat down with the frontrunner and he almost immediately controlled the meeting. He said to you, with sincerity: “Welcome to Australia. We’re the perfect market for your brand. I’ve been following your brand for the last several years and I predicted you’d eventually expand here. So I went ahead and registered your brand and your logo, and everything is legally ready for you to proceed selling franchises in Australia. Just to be clear, I own your brand name in Australia, but I will sign it over to you for $500,000.”
I didn’t make up that story. Well, not all of it. Something very similar happened to the late Jim Bugg, Sr. in the early 1990s when he traveled on an IFA-sponsored trade mission to Australia. At that time, ‘bad-faith trademark filings’ or ‘trademark squatting’ was not unusual in Australia and other countries around the world. The World Intellectual Property Organization defines ‘trademark squatting’ as “the registration or use of a generally well-known foreign trademark” that the squatter didn’t originate but registered anyway. By the 1990s, ‘trademark pirates’ were active in numerous countries and Bugg, who owned the Decorating Den brand in the U.S.A., was not the only victim.
Several years after Bugg’s experience, Ray Titus, founder of Signarama – eventually to become an international brand – discovered that Signarama was already registered in New Zealand! Rather than pay the “pirate” Titus renamed his brand Speedy Signs just for the New Zealand market and eventually built more than 230 units.
Given that information, you might think the first thing an emerging international franchisor must do is file trademarks around the world, but that’s not practical, and for most franchisors, it’s not affordable. Protecting intellectual property is important, but it’s not the first step to international expansion.
Here’s a five-step plan that will lead emerging brands to success as they expand internationally.
1. Succeed at home first
International franchise expansion was a very hot topic in the 1990s and particularly lucrative for many U.S. brands. Master licensing fees were set in the hundreds of thousands of dollars and occasionally hit $1m. The fees were not always collected, however, and many franchise professionals argued they also were not warranted. They weren’t warranted for two reasons: (1) some brands were barely successful at home before they started franchising internationally, and (2) some brands were inept at teaching master franchisees how to succeed. Through the years, licensing fees fell dramatically as did the number of signed deals.
Before even thinking about selling franchises internationally, “a franchisor must develop a good record of success at home at the unit economics and franchisee satisfaction levels,” advises William Edwards, CEO, Edwards Global Services. Nowadays, savvy foreign franchise candidates begin their due diligence in the franchisor’s home country.
2. Get your house in order
As you succeed at home, Edwards, who was a U.S. franchisor and an international master franchisee in five countries, says it’s important to “build your intranet to be global from the start” because people across the world will need access to your information 24/7/365. “Your intranet will be the best, cheapest way to get your system in front of franchisees and licensees everywhere.”
Also, Edwards suggests developing franchise manuals that will deliver training and support to franchisees in other countries. Walter Seltzer, EVP and international director of United Franchise Group (UFG), advises you to develop two training programs for international expansion. “A master franchisee needs to learn store and franchise operations – just like your domestic franchisees – but a master also needs to be trained to be a franchisor. The master needs to learn how to sell franchises and support franchisees.”
Part of getting your house in order is thinking about the resources you’ll need to expand abroad. “International expansion usually costs more and takes longer than initially estimated,” explains Robert Jones, CIO, Edwards Global Services. “Are you willing to commit the necessary resources, both human and financial, to the successful international development of your brand?” Jones advises franchisors to make a long-term commitment to international expansion and not to think of it as subsidization for domestic development.
3. Develop an international expansion plan
Now’s the time to protect your intellectual property. “Apply for trademarks in the countries of your choice,” says Edwards, “and do so before marketing in those countries.” Otherwise, you may be tipping your hat to someone who will apply for your trademark with the hope of selling it back to you! Engage an international franchise attorney who can help you create a strategy that will help save money while also protecting your marks worldwide.
Tipton Shonkwiler, president, Accurate Franchising, Inc. (also owned by UFG), warns that trademark squatters are still busy in international markets. “Be proactive,” he advises. “Secure your trademarks early on once you know which markets you want to enter.”
Edwards says that intellectual property protection has improved over the past 10 years, but there are still “potential potholes” including Australia, Canada and China, to name several. Edwards encourages U.S. brands to consider using the Madrid Protocol which allows original holders of a mark to get registration elsewhere.
“Now’s the time to protect your intellectual property”
Where you want to go in the world may not be as helpful as where you should or could expand your franchise. If money is a limiting factor – and it is for most franchisors – then you need to carefully select the countries for your expansion plan. Research will help you select the right countries and help you determine when to visit those countries.
“It will be easier to expand in countries where they speak your same language,” says Seltzer, who has spent a career helping UFG expand to more than 80 countries. “It’s equally important,” he continues, “to make certain your software (POS, accounting and CRM) will be adaptable in countries of your choice. Things to keep in mind are language, tax scenarios, and reporting.”
Franchise regulations also differ from country to country and may help you decide where to expand. Your legal counsel can help you identify ‘franchise-friendly’ territories and you may find helpful information on your franchise association’s website.
Shonkwiler explains that your expansion could be limited by “barriers to entry”. For example, your brand may be dependent on goods or services that are not available in another country. “You succeed because of your brand integrity, and if you can’t maintain it in one country you should select another country. Thinking that you can supply everything from America to a franchisee in the Asian market, for example, will not make financial sense. You will need local, or at least regional suppliers,” says Shonkwiler. It’s important to know where the suppliers exist in advance of any expansion.
“Franchisors also need to learn about the types of agreements and options that are available for international development,” explains Tom Portesy, CEO, MFV Expositions, the world’s largest producer of franchise expos. “Some franchisors prefer master licensing while others prefer area development or multi-unit agreements. Some franchisors prefer to joint venture in other countries.” Your choice of agreement may be dictated by the country. “The franchisor should be open to selecting the right strategy depending on the needs of the target market,” explains Torben L. Brodersen, general manager, German Franchise Association.
4. Differentiate your brand
The fourth step requires franchisors to think about two points of development: The brand’s unique selling proposition (USP) and the brand’s local market appeal.
Brodersen, who has more than 10 years’ experience helping franchisors enter Germany, says a brand must step into a new country with a strong USP and a bold appearance. Edwards agrees and adds: “If there’s no clear differentiation from similar brands then yours is just another brand doing the same thing as what already exists.” Before you select a country for expansion make certain your brand will be able to compete based on offering something that the market needs.
It’s equally important to offer something that’s a cultural fit, too. Franchisors strive for consistency and uniformity. However, Shonkwiler says you must be prepared to make changes for other cultures. Otherwise, your brand won’t appeal to customers. “Adapting your brand has become increasingly important in international franchising,” he explains. “If your brand isn’t culturally a fit, it won’t succeed.”
Perhaps no company understands adaptation better than industry giant McDonald’s. Every McDonald’s, no matter where it’s located, looks like the McDonald’s you know from home. The look is part of McDonald’s USP. However, on the inside, it may not be the same McDonald’s that you know from home. International menu items differ. In South Korea, for example, the menu includes items that are indigenous to the area such as corn chowder, bulgogi burgers and a McChicken sandwich topped with mozzarella sticks! Wherever it builds, McDonald’s makes sure it’s a cultural fit.
5. Identify your prospects before you leave home
The international franchise community includes resources to help franchisors not only identify where they want to expand but who they want to choose to be their franchisee or representative. Ideally, a franchisor will identify prospects by name and capabilities even before traveling to another country. “A foreign franchisor needs a local hero and a brand ambassador to succeed in another market,” explains Brodersen.
“A strong partner is essential.” Franchisors can often rely on government entities to help them find potential franchisees. U.S. franchisors, for example, can utilize U.S. Commercial Service offices worldwide to identify opportunities for expansion. National franchise associations also organize trade missions to other countries and can help find local partners.
Ultimately, if you’re going to expand internationally, be prepared to travel and live in your country of choice for a period of time. It’s a huge hurdle to find the best partner for another country, but that partner is going to depend on you for years to come and will expect you to deliver expert training and support.
International expansion may not be a top priority for emerging franchisors, but with success at home comes thoughts about opportunities worldwide. At that time, these five steps will help the emerging franchisor plan to succeed internationally.
THE AUTHOR
Dr. John P. Hayes, CFE, Titus Chair for Franchise Leadership at Palm Beach Atlantic University in West Palm Beach, Florida, teaches undergraduate and graduate courses leading to a Concentration in Franchising.
