Article originally published by Entrepreneur, July 2017.
While international franchising opportunities are booming, franchisors must make adjustments.
“There are massages…and there are massages,” says Lee Knowlton, the senior vice president in charge of global sales and international at Massage Envy, the Arizona-based provider of therapeutic kneading and skincare services. And as he tried explaining his company to would-be franchisees in Bangkok recently, he just couldn’t escape this wink-wink distinction. “I guess the image of Thai massage parlors is still a hurdle we have to overcome,” Knowlton says with a sigh.
In heading overseas, however, Knowlton is following one of the hottest playbooks in franchising. “Thirty-eight percent of the unit growth of the 200 largest U.S. franchisors is now overseas,” says Josh Merin, a director at the International Franchise Association. “And over the past three years, 80 percent of the collective unit growth of these companies has been outside U.S. borders.” That growth is expected to continue, Merin says, as a number of large players consider going global for the first time. Among them in the restaurant sector alone: Sonic Drive-In, the Oklahoma City-based drive-through chain, and Chick-fil-A, the Atlanta-based chicken sandwich purveyor.
What’s more, the current economic landscape offers two distinct opportunities for franchising. “Developed markets have better infrastructure to support all the real estate, banking and supply chain requirements, but competition may be tough,” says Mark Siebert, the CEO of consultancy iFranchise Group. Plus the dollar goes further now than in the recent past. Meanwhile, “emerging markets have sketchier business frameworks, but often they will have fewer direct rivals and lots of new shopping malls and offices to fill.”
And yet, much like massages in Thailand, introducing an American concept to a different culture isn’t always easy. Beyond the usual pressures and challenges of franchising, franchisors and franchisees working in foreign markets have to wrestle with idiosyncratic business environments, unstable political climates and unfamiliar cultural norms. These hurdles can be surprising and significant, requiring hard work, good money and careful attention on the part of both corporate and individual franchisees to adapt the product to the local tastes and customs, all without sacrificing hard-earned brand identity. As Siebert puts it, “International franchising is not for sissies.”
Knowlton, for one, isn’t discouraged. He’s a seasoned enough operator to know that cross-cultural expansion does not happen overnight. A decade ago, as president of Cold Stone Creamery, he went through a similarly challenging (though less risqué) culture clash when trying to take the U.S. ice cream chain to Japan. The shop’s employees are famously theatrical; every time a customer puts something in the tip jar, they’re supposed to break out into song. Knowlton figured Japanese franchisees would love the idea.
“This was the land of karaoke, after all,” he says. “Unfortunately, it was also the land where nobody tips.” When singing did happen, he remembers, “people looked at us as if we were insane.” So he changed the tactic: Customers were encouraged to donate to a local hospital via the tip jar. Now, 10 years on, there are more than 50 Cold Stone outlets in Japan, and both singing and tip jars have become part of the experience.
One thing is clear: If any concept is to succeed at all in a new market, franchisors and franchisees alike may have to make some adjustments to the original business plan. For instance, every concept taken to Japan — where 127 million people live on a landmass smaller than California — has to be shrunk to work in a much smaller space, from the size of premises to the packaging of consumer goods for people’s apartments. Other tweaks may be down to local whimsy. Yankee Candle releases specific scents for its different territories. Honey Lavender Gelato, “inspired by the artisanal honey trend,” is available only in U.S. outlets. Europe gets scents such as Pain Au Raisin.
Yet there are often wider cultural chasms to cross. “There are countless examples that show that just because a system performs well domestically, it doesn’t mean consumers abroad will respond to it in a similar way,” says Siebert. U.S. food franchisors have invested heavily in studying local customs and taste profiles, and sourcing new ingredients. McDonald’s uses paneer, a cheese commonly served in curry dishes, as a substitute for beef in India, where cattle cannot be slaughtered. Pizza Hut uses squid, mayonnaise and seaweed as pie toppings in Japan. Starbucks redesigned its original seminude-siren logo for conservative parts of the Middle East.
How are these changes decided? Often, they don’t come from the franchisors themselves; they come from the local franchisees, who know their market better than executives in America. “IP holders will always want to maintain control of their brands, but they will understand that local tweaks are often necessary,” says Martin Hancock, COO of North America at World Franchise Associates, which hooks up U.S. companies with international partners. The level of customization of goods or services is often built into individual deals and contracts, but he says there will always be some room to negotiate. “Sometimes changes are suggested and implemented by the franchisee before the initial launch; sometimes they are ongoing.”
Take Wingstop. The fast-growing restaurant chain offers as many as a dozen wing flavors on every foreign menu, and up to four of them are adapted specially to local tastes. The company also works with its franchisees to develop locally focused sides, drinks and desserts, including fried churros with multiple dipping sauces, flavored bubble teas and fried seasoned street corn — which was developed for the Mexican market and now appears across three international markets.
The same goes for Dale Carnegie Training, which runs workplace courses on strategic skills and leadership in 120 franchises in North Africa, Asia, Europe and Latin America. The company is built on the work of Dale Carnegie, the 20th-century sales guru and author of How to Win Friends and Influence People. According to Maguid Barakat, vice president of franchise development, the translation of the courses is a particular challenge, as it has to capture Carnegie’s “language” but also be compatible with the local culture. Often it falls to franchisees to find the ideal middle ground. “Partners need to be resourceful,” says Barakat.
Sometimes cultural differences can also necessitate major changes to how a business operates. In Saudi Arabia, for example, entire restaurants must be reconfigured so they have family sections for women and children. Similarly, changing rooms are of no use to women’s fashion retailers in the kingdom, as women are not allowed to use them.
Culture can impact the labor market, too. In parts of the Middle East, where labor is in short supply, some franchisors set up recruitment arms to bring staff from Indonesia, Pakistan and the Philippines, and sometimes they own property subsidiaries to accommodate them. Another quirk of operating in Saudi Arabia is the “phantom employee” — where the government enforces a workplace quota for nationals even though they may not show up on the job.
“This is why franchisors really do need to work with their local counsel, local partners and consumer research firms,” says Siebert. “Retaining local counsel early in the process can bring you up to speed on customs preventing the enforceability of certain contractual provisions, as well as basic formalities under local law.”
Safety can also be a factor, particularly in unstable regions. Like many other U.S. companies that operate overseas, Ace Hardware uses security firms in some countries in Latin America and the Middle East to accompany training and support staff for on-site visits. “The cost of protecting staff must be factored in when you expand globally,” says Jay Heubner, president and general manager of Ace International Holdings, who oversees more than 5,000 franchises in 55 countries. In some territories, security is a more constant issue. “A customer recently sent me a photo of our store in Kabul,” he says. “All the staff members are in their familiar red vests, smiling, but they’re surrounded by five Afghans in full camouflage holding machine guns.”
That said, a franchisor expanding internationally should also know that first assumptions have a tendency to be wrong. Take, for example, the security concern. According to Siebert, U.S. franchisees are often most successful in places where one might suppose anti-American feelings run the highest. This may have to do with the standard of local competitors. “Usually, these countries are importing something that is run more efficiently, with better customer service and superior staff training. They are paying for the know-how as well as the products,” he says. And with emerging countries just now embracing the mall culture that America pioneered a half-century ago, the only constant across the globe, it seems, is that there are great opportunities to be found. “The Middle East, Latin America and Asia,” says Siebert, “have a huge appetite for U.S. brands.“
So how can a franchise brace itself for the many challenges of overseas expansion? The key, experts say, is to do your homework and partner with the right people. And that isn’t cheap. Frequent market visits are absolutely essential, Siebert insists, as they provide insight on a brand’s potential viability, consumer preferences and expectations and existing competition. Finding the right local partner and conducting due diligence can gobble up time and money, too. “With trademark work, legal research, market research, travel, broker’s fees, marketing expense, letters of intent, initial drafts of contracts and disclosure documents, you could easily burn through more than $100,000,” Siebert says.
Heubner says Ace International does months of research into each possible new territory, considering everything from regional geopolitics to supply chain options — and racking up “months and months” of air travel. “We want partners who are well-capitalized, with the right experience in retail, and the enthusiasm to want to grow with Ace,” he says. Massage Envy’s Knowlton also stresses the importance of finding partners who have the right motives. “Often the people who are the most suitable — the ones with experience in retail or customer service — own other franchises, too,” says Knowlton. “You need them to be really passionate about your company and not just interested in assembling a portfolio of brands.”
The fastest way for a U.S. company to penetrate a mature market with a large, free-spending middle class, Siebert says, may sometimes be via a “master franchisor” — a well-funded, experienced local businessperson who works directly with the American parent and can then appoint or sell sub-franchisees to actually run the local stores. This has wide-reaching implications for the whole fee structure, the franchisee profile, and all the necessary marketing and training support. Alternatively, if an American company enters any market, it will likely be looking for the “area developers” — franchisees who commit to developing, opening, and operating (possibly through an affiliated company) a specified number of outlets within a defined territory and schedule.
Can a stateside franchisee bypass all this, and get a slice of this overseas action themselves? At the moment, probably not. “If you owned one or two locations of a franchise [in America], there is nothing to stop you from applying to open in Canada or Mexico,” says Josh Merin at the IFA. “However, franchises tend to use different development models internationally than they do domestically.” To develop in a new country takes a lot more money and corporate structure than small franchisees tend to have, and as a result, they likely wouldn’t make it very far in the qualification process. Some large franchisees stateside may be able to make the jump, Merin says, but they’d probably need a local partner.
Which leads us back to Massage Envy. While the company has not taken root in Thailand, it ended up planting its flag even farther south, in Australia. Last year two franchises opened in Sydney, and this summer, Massage Envy — which has more than 1,175 locations across the U.S. — will open four to six more outlets Down Under. “We envisage having 100 units throughout Australia within 10 years,” says Lee Knowlton. Deals are also in the works for Canada, Mexico and the U.K. — though, this being international franchising, nothing is guaranteed. “Sometimes negotiations break down at the very last moment. In around 60 percent of these cases, it is because you cannot agree on the financial terms. At that point, it is probably better to just walk away,” he says. “You’ll always meet somebody else.”