Understanding International franchising models
International franchising is exactly what it says the further replication of a successful domestic franchised business into a new country. Over the years, franchisors have adopted various models which have enabled them to enter new markets. In this short article I am going to discuss the four most common models used.
The franchisor grants the Master Franchisee the rights to duplicate its business in a defined region (often an entire country). Essentially, the franchisor is granting the Master Franchisee the rights to use two separate business systems:
The system for operating its core service at a unit franchise level (eg how to run a single site coffee and muffins shop)
The system for operating its franchise business (ie how to recruit, train, support and motivate franchisees)
Each system should be documented fully, and the Master Franchisee will have a blueprint for how to replicate the franchisor’s success in their own region.
Sometimes some local market adaptation is required (eg. if a food concept, possibly in the menu items offered, or perhaps there are local legislative requirements which affect the concept); however, the franchisor will retain total control of the system and branding, and changes will only be permitted with the franchisor’s approval.
If a Master Franchisee follows best practise guidelines, then they will establish at least one local franchise which they own, prior to awarding franchises to others; the reason for this is that they can then demonstrate to prospective franchisees that the concept works in their country; they understand the business better, and so can provide better support.
In return for the rights, the Master Franchise typically will pay an initial fee for the licence to operate the business in the agreed region for an agreed term. In addition they will pay ongoing fees which are normally linked to turnover, but could be margin on product supplied by the franchisor (eg in the clothing retail sector); they will also pay a percentage of the fees received from sub-franchisees when they join the network.
Master franchising is most commonly used for service-based concepts, and mobile product distribution brands.
The franchisor grants the Area Developer the right to open a number of franchised units in a defined territory; however, sub-franchising is not allowed. The Area developer therefore needs to have the financial capability of funding the establishment of the agreed number of units.
Typically, this type of arrangement is used for retail franchises, where the area developer’s ability to acquire suitable sites is a critical factor for the brand’s success. Sometimes, the franchisor will not operate as a franchise in their domestic market, but only internationally (so in effect, they behave as an area developer themselves in their home country).
The Area Developer will pay a licence fee which is linked to the number of units to which they have committed normally this will be split, so that a portion is paid initially to secure the area’, and an additional fee is paid each time a new unit is opened. Ongoing fees will be linked either to total revenues in the territory, or as margin on products supplied.
Area Development can be attractive where margins are tight, since there is no intermediate’ level in the vertical structure of the relationship i.e franchisor area developer customer (compared to master franchising where the relationships would be: franchisor master franchisee franchisee customer).
Under this arrangement, a franchisor will grant rights to a unit franchisee directly and will provide training and support in exactly the same way that they do in their home market. Sometimes such support is provided directly from the home market, but often, the franchisor will establish a base in the international market clearly this will depend on the logistics associated with fulfilling the franchisor’s commercial obligations to the franchisee. If the market is physically very close, this arrangement could work effectively; however, if the franchisor is located thousands of miles away, and in a very different time-zone, this may be less practical.
The other advantage of establishing a base in the international market, is that the franchisor can test/adapt their concept for that market prior to offering it as a franchise and because it is more proven’ it will be more attractive commercially to prospective franchisees. The downside for the franchisor is that this approach does require a far higher level of financial commitment, which is why many will try to secure franchisees directly, without having piloted’ the concept themselves.
The fee structure will be as for a domestic franchisee but there may be a higher cost associated with training, if that is to be handled at the franchisor’s head office. So an initial franchise fee, and an ongoing management service fee.
The franchisor will typically seek a local partner with complementary knowledge to that of the franchisor if say, a casual dining concept, they would seek a successful operator of an existing casual dining restaurant chain. The commercial arrangement can vary, but would normally involve the establishment of a new company which is jointly owned by the JV partners. The units are then rolled out either as company-owned businesses, or as sub-franchises. Funding for the business would be agreed on the basis of what each is bringing to the table expertise and knowledge has real value, as does sweat’ actually running the business. Clearly, this can only be determined once there is an agreed business plan.
In most JV arrangements, each party will have the opportunity to buy out the other in the event of certain things occurring on an agreed basis. Many franchise professionals are sceptical about JV’s, since its difficult for the franchisor to know what’s happening on the ground’, and so distrust/bad feeling can arise. If this model is used, its probably best to have a clear view on the exit strategy for both partners.
Each of these development models has its own advantages and disadvantages there is definitely not one size that fits all situations’ which is why many franchisors who have a presence in a number of countries, will use different models dependent on the local situation, and the strategic importance of a country to them. In the best franchise relationships, there is transparency, and the motivation of each party to an agreement is very clear this is especially true in international franchising.