Expanding overseas through franchising

What’s the best way for an ambitious brand to enter a new market? Is it to go it alone through organic expansion, committing maximum investment for total control? Or maybe it’s best to acquire and assimilate a proven business; providing you can find one and buy it at the right price of course.

It could be either of these options or neither of them. As an increasing number of HSBC customers can attest, there is a third way that is growing in popularity. It’s one offering a balance of risk and rewards that’s well suited to times of economic and political uncertainty.

Welcome to the world of franchising.

A recent gathering of franchise operators in Paris really brought home to me how diverse this third way business model has now become. Attendees represented enterprises large and small across 90 different lines of business, from office rentals and social care to professional services.

Fast food corporations helped blaze this trail and don’t appear to be tiring of it. KFC, for example, has become more franchise-focused in recent years by decreasing the share of restaurants it operates directly. But this is only part of the story. One study shows 12,000 different franchise systems exist worldwide, while franchise industry GDP is growing faster than the national economy in many markets, including the US and Germany.

So why is this trend gathering pace and how can it help your business expand into new markets?

First, consumer appetites for international brands are growing. I witnessed this first hand when I joined a lunchtime queue outside Jollibee, when one of Asia’s biggest fast food chain opened its first London branch. Consumers globally are not only becoming more diverse in their tastes, they are spending more. And it’s no longer just about affluent customers in highly-developed economies such as the UK, US, or Japan. Almost 3 billion people are set to join the middle-income ranks by 2050. The majority will live in Asia, where incomes are rising and levels of personal debt are typically lower than in the West.

Second, fast growing economies offer long-term opportunities. HSBC projects that over the coming decade, roughly 70% of global growth will come from markets we currently describe as emerging. As the single biggest contributor to global growth over the next decade, China will become the world’s largest economy by 2030. According to the World Franchise Associates, rapid development has created one of the world’s largest franchise markets, with more than 4,000 franchisors.

Where to start

For any company aspiring to adopt a franchising model, it all starts with market research. The ability to establish a unique brand position in the new market will determine long-term success, but from the outset costs must be understood to ensure sufficient margins can be achieved for franchisor and franchisee alike.

Choosing the right franchise structure follows. One option is to establish a corporate office to manage franchisees. A pilot can develop a concept, tailor products and address any regulatory requirements. The refined model can then roll out quickly to new franchisees.

Rather than establish a presence in country, an alternative is to partner with a master franchisee who is already active on the ground, and may operate a range of other brands. Their experience and local market knowledge may prove invaluable. Similarly, an agreement with an area developer can obligate them to develop a number of franchisees over a period of time, in a defined region or across an entire country.

Franchise joint ventures are also growing in popularity. Granting a franchise to a joint venture partner means greater control, though it also requires more capital to hold a majority share in the operation. Trusted advisers, including financial partners and government export bodies, can help determine the best fit.

Identifying business partners is the final step. Local franchisees equipped with knowledge of the target market can bridge culture gaps and enable co-creation. While the Big Mac is synonymous with McDonald’s worldwide, for example, the company has developed the Chicken Maharaja Mac as a beef-free substitute for the Indian market. The financial relationships created with local partners and their suppliers can be managed through a conversation with your bank around financing options.

Although effort is required to train and support franchisees, they typically operate within a blueprint defining how products and services are delivered. The franchise model therefore maintains control over customer experience and protects brand integrity for the franchisor. This is vital in the Instagram age. A new brand can gain a flying start through positive sentiments around quality, novelty or status, but equally missteps overseas can reverberate in established markets.

Ultimately, franchising offers a compelling solution for firms looking for a new way to secure long-term growth. In many cases a commercial opportunity will expand in line with the expectations and incomes of international consumers. With the right research, structure and partners in place, franchising creates a new gateway to the world.