Enter Germany, the Land of Fairy-Tale Castles

The key to success in Germany and many other countries is adaptation to the local market and culture.

By Franz-Josef Ebel

Octoberfest, BMWs and fairy-tale castles — Germany is known for its festivals, cars and culture. It is an affluent society. The average household net-adjusted disposable income per capita is US $31,000 a year, more than the Organisation for Economic Cooperation and Development average of US $26,000 but less than the U.S. figure of $41,000 (OECD statistics). It has a population of more than 80 million and is a little smaller than California, with twice as many people. 

For franchise brands that are looking to expand abroad, Germany ought to be high on their priority list given the economic strength, the logistical advantages, the stable legal framework, the relative ease of doing business (rank 15) and the potential for achieving substantial and sustained growth.

How does a franchisor from abroad enter the German market? After all, people speak German and not English. What is the preferred approach: Selling master franchise or area development licenses or setting up a subsidiary that develops the market like McDonald’s did 45 years ago? Does the product or service you offer appeal to the German culture? Do you have to change it because of different consumer tastes? Why should anyone acquire a license from a brand that is unknown in Germany and has not demonstrated success in the local market?

Jackpot or Setback?

For some U.S. brands, Germany has been a jackpot. Others have entered and failed. The most spectacular failure was Walmart, not a franchise but the world’s largest retailer. Walmart did not adapt its concept to the German culture and had to write off more than US $1 billion when it left Germany in 2006 after more than eight years trying to get off the ground. The example shows that even popular brands that are present in many countries can fail if they get it wrong. The key to success in Germany and many other countries is adaptation to the local market and culture.

Adaptation starts when speaking to potential master franchisees or area developers. Germany is a mature economy with an abundance of investment opportunities. Germans are number crunchers and want to know early in the talks the risk-return profile of your offer. They are always looking at the risks first and only then at the opportunities. Be prepared for tough business questions and few signs of emotions. A German might love your franchise but he won’t tell you that he actually does. The reason for not showing too much enthusiasm is the hope to get price concessions during the negotiations. 

If you have deep pockets, the best way to enter Germany is to set up a subsidiary, operate a corporate pilot and then start franchising. For most brands this is not a viable option. They are looking for a master franchisee or area developer. However, a master or area developer will want to have some reassurance that your system is actually working in Germany. The easiest way to demonstrate this is to establish a corporate pilot with a German partner.

Seven steps to success

Do your research. Is there demand for your product or service in Germany? What are the main competitors? Is the competition ahead or behind? Can you uphold your unique selling proposition? Do you need to register your product? What are the legal requirements? You can do such a feasibility study yourself or ask a German franchise consultant to support you. The second route is faster, as the consultant is familiar with the German market as well as some pitfalls, including legal issues.

Find a German Partner. Find a local partner from your industry preferably with franchise experience that can operate your corporate pilot. This requires a limited investment of one unit but allows you to prove that your system is working in Germany. It enables you to attain a much higher price when selling master franchise or area development rights and demonstrates your commitment to the country.

Adapt the pilot. Together with your local partner and in some cases the help of a consultant, adapt your products or services to the German culture. Usually 80 to 90 percent of your franchise system’s products do not need to change. But you might have to alter, for example, the menu. You almost certainly have to adjust the marketing and you often have to change the way you handle employees given the different German labor laws. Once all this has been done, you can offer an optimized system for Germany, again achieving a higher price when selling licenses.

Choose expansion method. Now you are ready to start franchising in Germany. You have to decide what fits best: Awarding a master franchise or area development rights. This very much depends on the industry you are in. If you chose the master route, you have to contemplate whether you want one country or several regional masters.

Get legal done. Ask your franchise lawyer to develop the master or area developer agreement and ask a German franchise lawyer to develop the local agreement and the pre-contractual disclosure document in line with the master agreement. Remember to register your trademark. The good news: Lawyers are much less expensive in Germany than in the U.S.

Find your Master. The local partner that is running your pilot might become your master or one area developer, but this does not need to be the case. Make sure you find the right master franchisee for your system. He or she needs to have not only the funds, but ideally has experience in franchising. However, as you have invested in the pilot, your chances of success are greatly enhanced and do not only depend on the master or area developers.

Support the Master. Support will make your master successful. This will lead to an ever-growing stream of royalties, substantially boosting your profits. This stream is more important than the one-off master fee as you will be enjoying it every month and not just once.

What are the hottest sectors? 

Every sector is hot in Germany but in view of the aging German population — 27 percent are older than 60 today and this will rise to 37 percent by 2030 — services for Baby Boomers are in high demand. U.K. franchise system “the Seasons Art Class,” which provides art classes for the elderly, launched successfully in Germany last year. The increasing number of domestic and foreign senior-care brands are set to benefit from a political shift towards home care and the ample funds of the German mandatory long-term care insurance.

Also, Baby Boomers are increasingly eating healthier food. Domestic systems like “Hans im Glück” or “Salädchen” have jumped onto this bandwagon and there is plenty of room for foreign concepts that provide health foods. 

Fitness has also seen a boom in recent years, with domestic chains growing bigger and Bodystreet fitness centers is entering the market. It provides personal training based on electro muscle stimulation, achieving the same effect as three two-hour workouts in a gym in just 20 minutes. 

Products or services that target the 50-plus age group will be in high demand in Germany and other European countries for years to come.

When you want to bring your franchise to Germany, take a medium-term view given the size of the market and the opportunities. The one-time franchise fee is not that important. What is important is to find the right master franchisee or area developers that build up your brand and guarantee not just a one-off payment, but a recurrent stream of royalties that makes you happy at the start of every month. 

Franz-Josef Ebel is managing director of Master Franchise Germany. Find him at fransocial.franchise.org.