FRANCHISE: International markets franchise entry strategies

International franchise brands entering a new market have a choice between three entry strategies. The first is direct franchising where the franchisor sets up an office in the target market and directly recruits franchisees in the same manner as they would at home. Given the distance from head office and the attendant complications of directly dealing with market dynamics in a foreign country, most international franchise brands avoid this choice as much as possible. They mostly only register their Intellectual Property Rights (IPRs) in the target market and opt for either of the following strategies.

Second is the area developer strategy where the foreign franchisor, having protected IPRs in the target market, recruits and selects one franchisee who assumes the franchisor’s role in the assigned territory.

Under this strategy, the area developer franchisee is allowed to recruit franchisees in their assigned territory (sub-franchise).

The area developer supports the franchisees, in the same manner as the franchisor would if the franchisor was recruiting franchisees directly. The franchise fees collected by the area developer is shared with the international franchisor on a pre-agreed ratio.

This strategy is also not very popular with international franchisors because it reduces the fees that the franchisor receives.

Also, since the franchisee area developer takes the role of the franchisor, it could easily fall into a principal-agent legal relationship where acts and omissions of the international franchisor are deemed to be carried by the local area developer franchisee, a situation which is against the normal principles of franchising.

The third market entry strategy, and the most commonly used by a majority of international franchisors, is the master franchise model.

The international franchisor, having secured IPRs in the target market, recruits and selects a local franchisee to grow the brand. The selected franchisee has to set up an agreed number of outlets over an agreed period, using own resources, unlike in the area developer model which allows sub-franchising. The international franchisor supports the master-franchisee in the same manner as the direct franchisees at home, only that this time, the master franchisee is far away from head office and might need more attention than the local franchisee at home.

Generally speaking, and in the traditional franchise set ups, master franchises are, ideally, set up and run by locals based in the target international market. This is because locals are presumed to know the local environment better, command a better grip of the local culture, command some deep respect in the local environment and generally understand the political landscape and other market dynamics better than outsiders.

There are, however, incidences where international franchisors recruit and assign master franchise rights to international business people. This is mainly where they are unable to identify locals with the requisite capacity to invest to achieve the target outcomes.

This trend is also supported by recent developments in globalization and technology which allow business owners to generate and easily access in-depth market information, enabling them to run businesses off-site.

A good example is the first Dominos Pizza and Cold Stone Creamery master franchisee for East Africa, who is a Singapore-based businessman.

Regardless of the market entry model chosen, the bottom-line remains achievement of the franchisor’s set financial targets and the relative ease thereof. The model chosen must support the system-wide financial targets without reducing the contribution of the target market to the group results, which would otherwise dent the franchisors’ financial outlook.

The writer is a franchise consultant working to promote adoption of franchising in Africa. He works with country apex private sector bodies to increase the uptake of franchising by helping indigenous African brands to franchise.