Harvesting intangible assets via global franchising

By Andrew J. Sherman

Posted: 24th September 2018 12:35

Just as the overwhelming popularity of franchising has captured the excitement of United States economy over the past 40 years, it has also attracted genuine attention in the overseas markets over the past 25 years and is likely to be a major trend in the future for harvesting and monetising a growing company’s intangible assets.
 
Avoiding “square pegs in round holes” syndrome
 
Many companies decide to launch an international franchising program without really understanding the dynamics of the local marketplace. For example, one global coffee-shop chain based in the United States had to significantly alter their trade dress and store design specifications based upon significant differences in the time that an average consumer will sit down and enjoy their beverage, either alone or with friends. Excluding for the moment the small number of customers who sit with laptops enjoying WiFi for hours at a time, it seems that in the United States, the average “sitting time” was seven minutes, but in the United Kingdom (UK), it was 21 minutes and in India, it was 45 minutes. It seems that abroad, people actually take the time to talk to each other and enjoy their beverages! But this means that store design and the number of seats and tables need to be very different to succeed, also affecting construction costs and rental rates. Variables such as speed, convenience, consumption, priorities, purchasing power, disposable income, age trends, demographics, work habits, communication norms, and cultural values all need to be carefully considered from market to market.
 
Each growing company considering global expansion and U.S. market penetration should build its own decisional and strategy map in order to assess the viability of the overseas franchising business model. Be sure to include variables that will be relevant to the success of your particular franchising system and your underlying products and services. Be sensitive to potential variations in size, price, consuming patterns, frequency of consumption, competitive analysis, etc. as you build your model. Your willingness to invest meaningful time and resources into an international expansion program will ultimately define success.
 
When embarking on an international expansion program, company leaders should always consider:
 
Language barriers: Although it may seem simple enough at the outset to translate the Operations Manual into the local language, marketing the system and the product may present unforeseen difficulties if the concept itself does not "translate" well. The local country's standards for humor, accepted puns or jargon or even subtle gestures may not be the same as your domestic country's norms or idioms and may need to be adjusted accordingly.
 
Taste barriers: Franchisors marketing food products have frequently found that foreign tastes differ greatly from the American palate. These factors should be carefully reviewed with the assistance of local marketing personnel and product development specialists before undertaking any negotiations with suppliers and distributors. The challenge is how to modify the particulars without losing the essence of the core product or service.
 
Marketing barriers: These types of barriers most frequently go to the deepest cultural levels. For example, whereas many overseas markets have developed a taste for "fast food" burgers and hot dogs, differences in culture may dictate that the speed aspect is less important. Many cultures demand the leisure to be able to relax on the premises after eating a meal rather than taking a meal to go. These cultural norms can, in turn, be affected by factors such as the cost and availability of retail space. Direct and subtle messages in advertising campaigns may need to be modified, the appeal of using a particular celebrity in a campaign may vary and the channels for promotion may also need to be modified to meet the educational patterns and needs of the local consumer. Even marketing methodologies may need to be modified. In certain cultures, coupons are widely accepted and used by people who are both rich and poor (such as in the U.S.) but in other cultures, coupons are not widely used or accepted.
 
Legal Barriers: Domestic legislation may not be conducive to the establishment of franchise and distributorship arrangements. Tax laws, customs laws, import restrictions, corporate organisation and agency/liability laws may all prove to be significant stumbling blocks.
 
Access to Raw Materials and Human Resources: Not all countries offer the same levels of access to critical raw materials and skilled labor that may be needed to operate the underlying franchised business. The franchisor may want to consider what changes in the system may be feasible to accommodate this resources challenge without sacrificing the core business format.
 
Government Barriers: The foreign government may or may not be receptive to foreign investment in general or to franchising in particular. A given country’s past history of expropriation, government restrictions, and limitations on currency repatriation may all prove to be decisive factors in determining whether the cost of market penetration is worth the benefits to be potentially derived.
 
Business Formation: The structure that the international franchising transaction will take must be determined (i.e. foreign corporation, area developer, single-unit operators, joint venture).
 
Choice of Territory: A territory overseas may consist of a major city, an entire country or even a geographic region encompassing several countries. The chosen territory may well affect sales, distribution and the ability to expand at a later point in time.
 
Intellectual Property and Quality Control Concerns: Protection of trademarks, trade names and service marks are vital for domestic franchisor’s licensing of intellectual property overseas. The physical distance between the franchisor’s domestic headquarters and the overseas franchisee will make the protection of intellectual property and the monitoring of quality control more difficult.
 
Local Laws: Domestic legislation needs to be examined as well for issues arising under labour law, immigration law, customs law, tax law, agency law, and other producer/distributor liability provisions. The need for import licenses and work permits will also need to be considered.
 
Sources of Financing: The territory chosen may affect the ability to maintain and sustain financing for the undertaking, as well as affecting the ability to receive risk insurance both publicly and privately. The franchisees in the targeted markets must have access to the financing necessary to establish single-unit franchises.
 
Expatriation of Profits: This can frequently be the most decisive factor in deciding whether to enter a given market or not. If a franchisor is restricted in the ability to convert and remove earned fees and royalties from a foreign jurisdiction, then the incentive for entering the market may be completely eliminated.
 
Taxes: The presence or absence of a tax treaty between the franchisor’s home country and the targeted foreign market can raise numerous issues and may well affect the business format chosen.
 
Dispute Resolution: The forum and governing law for the resolution of disputes must be chosen. On an international level, these issues become hotly negotiated due to the inconvenience and expense to the party who must come to the other’s forum.
 
Use of a Local Liaison: It is critical for the domestic franchisor to have a local liaison or representative in each foreign market. This local agent can assist the franchisor in understanding cultural differences, interpreting translational problems, understanding local laws/regulations, and in explaining the differences in protocol, etiquette and custom. It may be advised to offer employment and equity to these foreign nationals so that they have a vested interest in the success of your operations abroad.
 
Naturally, these opportunities also bring certain challenges for which appropriate strategies must be developed. For example, the world’s leading franchisor, McDonald’s Corporation, when it opened its first outlet in Iceland, but had to build an underground heated parking lot to attract customers and also recently opened in Israel, but spent months fighting with the Israeli Agriculture Ministry over the importation of the proper strain of potatoes for its french fries. Are problems like these insurmountable and enough of a barrier to reconsider overseas expansions? Absolutely not. But these examples are enough to warrant a thorough investigation of the company’s “readiness” to expand internationally and thorough knowledge of the targeted markets.
 
Andrew J. Sherman (@AndrewJSherman) is a partner and Chair of the Corporate Department in the Washington, D.C. office of Seyfarth Shaw, co-chairs the firm’s Global Franchising practice and is a top-rated Adjunct Professor in the MBA and Executive MBA programs at the University of Maryland and at Georgetown University Law Center. He is the author of several books, including Harvesting Intangible Assets, Franchising & Licensing and his latest released January 2017, The Crisis of Disengagement.

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