Strategies for International Development in Uncertain Times
Franchising World, November 2008
Too many franchisors examine international expansion only when domestic economic conditions are favorable or they otherwise have completed development in the U.S. market.
By Gaylen Knack
The year 2008 has been challenging for many U.S.-based franchisors. Although the economic downturn or recession, depending on your perspective, in the United States has not uniformly affected franchisors, many sectors have been hard-hit. Few franchised units located in the United States are experiencing the double-digit sales growth so common in recent years. Rising energy prices, which only recently have cooled, higher unemployment and a record housing bust have all contributed to fewer dollars in consumers’ pockets.
Some of these same symptoms of an ailing U.S. economy also have negatively-affected franchisesales activity. Historically, a downturn in the U.S. economy has been beneficial to franchising as laidoff employees with severance packages searched for new careers outside the corporate world. Many of the newly-unemployed, however, face shrinking severance packages and no longer can rely on home-equity financing as a source for capital to acquire a franchised business.
While economic conditions in the United States present limited opportunities for growth, economic conditions in select regions outside U.S. borders remain robust and serve as excellent environments for opportunistic franchisors. For franchisors facing few opportunities for growth in the domestic U.S. market, is now the time to examine or revisit expansion overseas? Should franchise executives reprioritize their company’s strategic plans and pursue international expansion with a greater sense of urgency?
Why Take the Step Now?
Reprioritizing a business plan to pursue international expansion in today’s changing economic and social environment requires more than a careful assessment of traditional risks and rewards. In fact, such an assessment often has led franchisors to delay or forego international expansion. In today’s environment, franchisors seeking to sustain growth may no longer have the luxury of ignoring international opportunities. While the United States presents a stagnant market for many franchisors, business is flourishing in many other regions of the world as personal income and domestic economic production skyrockets. These trends, if continued, create opportunities for U.S.-based franchisors.
Franchising industry veteran and iFranchise Group Senior Advisor Leonard Swartz, CFE, concurs: “So long as a franchisor is profitable and has sufficient resources to maintain domestic operations, it should not use a weak U.S. economy as an excuse to forego international opportunities.”
Companies such as Burger King Corp. already have adjusted strategic plans to seize this opportunity. Earlier this year, the fast-food company announced that 80 percent of its growth in the next five years likely would come from overseas expansion. Other business-savvy franchisors have made similar adjustments to their strategic growth plans. By identifying international expansion as a strategic priority, Burger King and others hope to ride the wave of economic growth experienced or anticipated in foreign markets.
Beyond opportunistic efforts to participate in expanding foreign markets, however, franchisors also must recognize other potential benefits in acting now to implement a global-growth strategy. Master franchisees and other foreign partners are critical to the success of franchise programs in foreign markets. The number of qualified candidates, those with the financial and operational resources to successfully implement a development strategy, are severely limited in many foreign markets. These qualified candidates are highly-sought and late-comers to the market are left to pick among inexperienced or otherwise less-qualified candidates. As a result, franchisors who delay international expansion have fewer choices in the selection of a partner and face longer odds in successfully developing a market. Late-comers to a market also face increased competition from more fast-reacting rivals. Competitors, both foreign and domestic, who move quickly into an expanding market gain an edge in developing their brands and images and can secure the prime real estate locations sites for development. Add up each of these challenges and franchisors realize that a delayed entry into a market may mark the difference between success and failure in a foreign market.
Assessing the Risks: Looking Beyond Traditional Issues
Franchisors re-evaluating the role of international development as part of a strategic business plan must ensure that they have the economic and operational resources to successfully launch or expand an international development program. Traditional analysis of operational and financial preparedness has been discussed at length in recent years. To improve the chances of success, however, franchisors also must consider factors driven by recent economic and political events.
First, franchisors must consider the economic health of a country or region and the factors that may lead to sustained growth in prioritizing target markets. In the European Union, for example, many member countries continue to face relatively high unemployment and a regulatory environment that can stifle the growth of small businesses. As a generally energydeficient region facing high-energy prices, many EU-member economies are stalling and face some of the same challenges as in the United States. On the other hand, energy-rich countries in the Middle East and labor-rich India present promising economic environments for many franchisors.
Franchisors also must consider the availability of resources within the target market which are necessary to successfully develop their specific program. With financing opportunities drying up in the European Union, development of a capital-intensive franchise program becomes more difficult while opportunities may remain promising for a low-investment program. In other countries, such as Australia, the shortage of quality prospective master franchisees may discourage franchisors from immediately moving into an otherwise promising market.
Supply-chain issues also take on added significance in assessing the prospects for success in pursuing a global growth strategy. Accelerating oil prices result in increased commodity prices and transportation costs. These inflationary pressures will force franchisors with internal supply-chain organizations to consider “neighboring,” a concept in which supplies for customers (i.e., franchisees) are sourced from neighboring regions to reduce transportation costs and promote more environmentally-friendly methods of bringing goods to the market.
In assessing the legal and political environment of targeted markets, franchisors must not only examine the current environment, they also must address future uncertainties. The number of countries adopting franchisespecific laws and regulations continues to grow. Not all of it is beneficial to franchising, as witnessed in Malaysia and at times in China. The willingness of the government to look outward for advice, versus an inward, isolationist viewpoint, lends promise to potentially-fair regulation that may actually improve the environment for franchising.
As for political assessments, the challenge remains daunting as companies attempt to foresee political developments that may prove fruitful (India and the United Arab Emirates) or disastrous (Venezuela and certain former Soviet republics).
Franchisors must consider political risks that may arise months or even years from now. Assessments may be difficult and lead to indecision. Given the numerous options for market expansion, however, franchisors can determine the amount of risk which is appropriate for their companies. Swartz advises: “Even if now is not the appropriate time to expand, franchisors should keep their foot in the water. Franchisors can inexpensively lay the groundwork for future international expansion by maintaining a list of interested prospects, protecting valuable trademarks in key countries and attending local seminars on international topics such as those sponsored by the IFA.”
Too many franchisors examine international expansion only when domestic economic conditions are favorable or they otherwise have completed development in the U.S. market. While companies must reserve sufficient resources to address domestic challenges and opportunities, they should regularly reassess their strategic plan to ensure that the opportunity to develop or expand a global growth initiative is not lost.
Gaylen Knack is a partner in the Minneapolis office of Gray Plant Mooty. He can be reached at or 612-632-3217.