Real Estate: A Fundamental Part of International Franchising

International real estate decisions define a significant fixed cost which helps − or hinders – profitability.

By Rodrigo A.-Valderrama

Location, time and cost/return are three significant maxims of real estate pertinent to franchisees. Local customs, sales volume, cross-border currency permits and operational profitability are the cream topping investment concerns. This applies to both domestic and international opportunities. Franchisors are in the same boat when investing their capital, alone or in joint venture. Real estate costs can comprise more than 8 percent of the value of gross monthly receipts, depending on space size, sales ticket and volume − impacting net income. What factors are key ones in making the correct decisions before the lease contract is signed? What is the role of the franchisor in adding value for the international franchise fees while helping a franchisee’s success in this business aspect? Robert Dorfman, formerly the second largest franchisee for a national fast-casual chain, is preparing for the opening of his new World of Beer franchises in Charlottesville and Ashburn, Va. “The benefit to paying a royalty fee is to take advantage of the brand equity and operating systems successfully created by someone else,” Dorfman said.  His first restaurant is due to open months ahead of the franchise average. Timing acceleration saves him money since payroll for his general manager and staffing, along with other expenses would otherwise accumulate before sales are generated. Operating systems extend to real estate know-how and support as part of the royalty fee value. Broker expertise can offer objectivity.

Real Estate Stakeholders

Essential stages of real estate start with understanding your needs, varying by market, followed by customs and local regulations of doing business. A franchisor’s property expertise transferred to a foreign franchisee with different social, culinary and business standards, as well as excellence benchmarks, is bridged as much by managerial art as institutional knowledge and execution. Stakeholders in real estate include: the franchisor (receives royalty from a successful franchisee), the franchisee (smart start-up location/build-out investment translates to more clientele and efficient operations), the landlord (lease conditions that do not over-burden the tenant result in a more profitable long-term investment) and local government authorities receive real estate and profit taxes. Consumers of international franchises are also stakeholders, benefiting from, and paying for, a consistent quality of product and experience, if not price, across borders. Depth of international management experience is a franchisor investment that generates profitable overseas operations with an increasingly globally conscious clientele. This growing clientele is ever mobile, touring the world and complemented by trans-national retirees valuing consistent quality brands.

Negotiations and Adaptations

International franchise leases can range from five to 15 years or longer, depending on amenities and location desirability, adding to risk tolerance of the new franchisee. Franchisors often assume the option to continue with a lease contract, in case a franchisee falters, to assure a subsequent franchisee’s desirable location in a growing market. There should not be a cost to this; it gives the landlord assurance. According to World of Beer Chief Development Officer and co-owner Ben Novello, former president of an international steakhouse chain, “Real estate is the one thing you cannot change. If the site is wrong, it’s an expensive fix.” Donnie Everts, vice president for international expansion cautions, “advice on build-out efficiencies” and negotiations are vital franchisor contributions.

• The multinational Juan Valdez Café arrived at its present franchising form as an affiliate of a more than 50-year-old, 50,000-family Colombian coffee growers’ association. The “nonprofit,” fair trade cooperative initially placed its stores in U.S. metro areas, such as Washington, D.C. The firm adapts its real estate guidance, taking cues from international franchisees, and then integrates the coffee house designs to local reality. The franchisor runs a feasibility study on franchisee proposed locations prior to approval. Eighty cafés from Asia to the Caribbean will be boosted by the Florida franchisee’s plans to grow more than 50 stores in five years. How? Store layout options from full coffee house seating to a quick coffee bar allow franchisees to adapt to prime location opportunities.
• John Eucalitto, president of Wayback Burgers (formerly Jake’s) adapts international growth by regions. A Saudi Arabian businessman who studied in the United States returned home and eventually sought the master franchise for his region. Weather and other conditions in the Middle East favor a shopping mall environment. A software programmer from India, Piyush Desai, living in London, sought a franchise in the United States to take advantage of investment facilitated immigration status. Piyush now operates a franchise in Ashburn, Va., learning the marketing ropes.
• Leonardo Llamas Trivi of Argentina sought to acquire a Wayback Burgers franchise in Florida and later convinced the company to sell him a master franchise in South America. The CEO jumped ahead, starting Llamas Trivi with the Latin franchise. A site is leased in European-flavored, fashionable Buenos Aires. Major international food competitors are well entrenched there in enclosed malls. Llamas Trivi credits his franchisor’s management expertise (value for royalty) in selecting a locally nonconventional on-street retail presence to increase the public’s awareness of the (locally) new brand. The mall would’ve had higher costs, including a sign-up fee for lease of up to one month’s projected revenues. These funds can instead be applied to a standalone building, with more upscale interior build-out than the U.S. franchisor’s norm, fitting for a culture that values longer meals and personal interaction. Local bureaucracy and learning curve delayed the first store’s opening. A higher sales volume and manageable break-even due to rising disposable income spending is expected to compensate start-up investment. This is in a slower, weaker economy than regional neighbors.

Most franchisors are keen on real estate visibility, accessibility and patron demographics. Some, such as cleaning services, take the equipment and labor to the client. The resulting lower real estate expense is often at least partly offset by higher marketing costs.

Factors Affecting Profitability

Fluctuating long-term international interest rates impact local real estate costs that affect profitability. Franchises should lock-in long-term lease contracts with predictable rate changes. The International Monetary Fund’s latest Global Financial Stability Report now considers (not predicting) scenarios of how a “bumpy” U.S. “exit from unconventional monetary policy” could affect Canadian, European and Asian long-term bond interest rates. These securities are benchmarks for international capital investments; they have interest rate repercussions - on expected rates of return via lease rates for landlords (costs for tenants) - worldwide. Execution timing is vital once the real estate is selected; the wait for the right location can be crucial to making the franchisee profitable. The experienced local/international real estate broker guides franchisor/franchisees and the landlords/sellers to arrive at a beneficial transaction. U.S. franchisors can mistakenly assume real estate aspects they take for granted are known to international stockholders investing stateside. These franchisees need more hand-holding. International real estate decisions - including food establishments,  hotels, even lifestyle maintenance - rely on local franchisee expertise and global franchisor institutional knowledge, often coupled with international broker market knowledge to define a significant fixed cost which helps, or hinders, profitability.

Rodrigo A.-Valderrama is managing director of Plantation Intl, and an associate of KW Capital Properties, is an international corporate and financial ventures expert. Find him at fransocial.franchise.org.