Exporting Americana one Smashburger at a time (part 3 of the Expanding Abroad via Franchising series)

Expansion of U.S. companies abroad via franchising has become a very hot topic.  As part of our franchise expansion abroad series, we continue to highlight the issues and opportunities franchisors encounter as they expand internationally.  Internationally recognized franchisors such as McDonalds®, KFC®, Subway®, Pizza Hut® have been expanding globally for decades and continue to do so at very healthy rates, serving as examples of successful transfer of both the American way of life and successful business concepts.

What is interesting, however, is a growing number of small and medium franchisors who have begun to craft serious international expansion plans.  Undoubtedly, the main driver of such expansion is the economic slowdown here at home.  That trend, combined with explosive growth rates of emerging markets, availability of local seed capital. emergence of the middle class in multiple countries and insatiable demand for western goods and concepts, created a very fertile ground for the export of franchise business concepts.

Although I think that international franchise development is one of the most interesting and potent ways for U.S. companies to expand abroad, I have certain reservations and see certain risk factors, some of which I would like to raise in this post.  These are being covered in depth in the upcoming book Fluent In Foreign Franchising™, to be published in 2012 by the Princeton Council on World Affairs.

Commitment – International expansion requires significant commitment of management’s time, as well as administrative and financial resources. This is not something that should be taken lightly, or as a band-aid for slowing unit sales during the recession at home. Granted, the recession may have been a catalyst to explore expansion abroad, but deciding to expand internationally is a very, very serious decision that has to be carefully weighted and planned.  It is better not to do it, then to do it half-heartedly.

Every international franchise consultant talks about adaptability of the concept to the target market, need to protect the IP, develop a plan and to find good partners. Very few actually go beyond advise and help carry out the expansion.  Thus the franchisors wishing to go into foreign markets must either commit their resources to develop in-house expertise or hire an experienced firm to completely manage the international operations as a profit center. I would be happy to discuss how the franchise development division of the Fluent In Foreign™ organization can power international expansion efforts for your franchise regardless of the expansion approach selected.

Compliance – Few franchisors going abroad consider compliance issues such as export controls, or implementation of the Foreign Corrupt Practices Act (FCPA) policies. Granted, when one sells a fast food franchise, which primarily caters to consumers, FCPA is probably not the first thing one thinks about. Yet, consider the risks to the corporate franchisor when one of you prospective franchisees in an emerging market offers a bribe to a government official to get prime land to build several drive-through outlets. Further consider that this franchisee is part of the opposing political party (happens much more often in emerging markets than you may think)  and the local press sniffs out and picks up the story. This will end up on the internet and will cross the desk of the local U.S. Embassy official.  It then will travel through the U.S. government’s  email network and wind up at the SEC, which decides to go after the entity, as it has roots in the U.S.   I will leave the rest of this scenario to your imagination and will not discuss its legal ramifications as I am not a lawyer.   Yet the risk of such a scenario replete with stiff financial penalties, criminal persecution and negative publicity are more real now than ever before.

Risk Management  – This brings me to my next point – risk management.  International expansion is difficult and fraught with peril. Yet, it is possible to drastically improve the odds of success by managing a number of risks.  Structuring franchise agreements in a way that allows the franchisor to disengage cleanly from the failed relationship, keep absolute control of the IP in country, minimize risk of circumvention and copycatting, assure payments from the franchisee for open account shipments, and mitigate the risk of damage to the global brand name. These and multiple other factors can be addressed as part of the comprehensive risk management program each franchisor should consider and incorporate into its offering process.

Education – training and education is an integral part of every good franchise offering.  Prospective franchisees learn how to follow the company’s operating manual, market their franchise, set up books and hire staff.  To increase the odds of success (or to mitigate the risk of failure, if you will) a comprehensive education program consisting of introductory instruction on FCPA, brand protection, international account receivable and working capital financing should be added as part of the initial training process. As the franchisees grow their respective businesses, they should be offered instruction on available growth financing, leasing, political risk insurance,  management, along with strategic management and multi-unit operations training.

Financing – financing international franchises is an interesting topic. Oftentimes, international franchise buyers come to the table with readily available funds to buy a first unit or two.  Since financing through local banks is generally very onerous and expensive, very little or no leverage is used and many franchisees seek to expand through retained earnings.   Many do not realize that very inexpensive financing programs exist to help franchisees ramp up their operations more quickly to achieve economies of scale and protect their competitive market positions.

Financing through these programs also carries a hidden benefit of requiring franchisees to keep accounting records, which will stand up to the scrutiny of the U.S. government, thus strengthening the chances of the franchisor of receiving more accurate royalty payments.

To aid franchisors who have either recently started their international expansion efforts, or who are considering expanding abroad, succeed, Fluent In Foreign Franchising has developed its proprietary D.I.C.E. & Finance™ (Develop, Insure, Comply, Educate & Finance) methodology.  Delivered by world-class legal, financial and international development professionals, D.I.C.E. & Finance™ provides a comprehensive strategic business development and risk mitigation platform upon which day-to-day operations of the oversees franchisors will successfully strive.

I hope you enjoy the article below and as always, welcome your comments.  You can reach me at agordin@broadstreetcap.com .

Smaller Franchisers Expand Their Horizons

A Smashburger in Kuwait? Here’s why it makes sense

By ANGUS LOTEN    as seen in the Wall Street Journal, November 14th, 2011

Over the past month, a Smashburger outlet in Denver has had some unusual help in the kitchen: a group of Kuwaiti entrepreneurs.

The burger flippers were prospective franchisees looking to open Smashburger outlets back home—and the fast-food chain hoped the hands-on experience would help them better serve customers.

Kuwait might seem a remote target for a franchise that’s not anywhere near the size of, say, McDonald’s. But Smashburger Chief Executive Dave Prokupek has big plans for international expansion—not only across the Middle East but also Asia and Central and South America.

Why? Those regions were largely unscathed by the recession, as well as being places where middle-class consumers have a growing appetite for American goods and services. “Western premium brands have done extraordinarily well in the Middle East and elsewhere,” Mr. Prokupek says.

It’s a Small World

Before the downturn, small U.S. franchises typically wouldn’t stray far from an original location. Now economic uncertainty at home, and in other Western economies, has prompted a growing number of franchises to look farther afield. They’re turning to markets in the developing world where credit continues to flow, franchise buyers face fewer barriers to financing, and American goods and services are in high demand.

[OVERSEASonline]Magnolia BakeryA Magnolia Bakery outlet in Dubai—far from the small chain’s New York home

“Five years ago, few smaller brands would have considered these markets,” says William Edwards, CEO of Edwards Global Services, an Irvine, Calif., global franchise consulting firm. “The big challenge now is that in the U.S., it’s very difficult for new franchisees to get financing. Money is not a problem in emerging markets, and there’s a lot of demand.”

Steve Abrams, co-owner of Magnolia Bakery, is seeing that firsthand. Two months ago, the New York cupcake maker made famous by “Sex and the City” received state approval to sell franchises. Today, it’s fielding hundreds of queries from prospective owners across Asia, the Middle East and South America.

“We got requests from all over the world, but it’s heavily weighted to emerging economies,” says Mr. Abrams. He expects to close up to a half-dozen deals by the end of the year, citing interested buyers in Lebanon, Saudi Arabia, Kuwait, China, Thailand and Brazil.

In a recent survey by the International Franchise Association, nearly 85% of more than 150 U.S. franchisers—including chains with fewer than 50 locations in the U.S.—said they planned to start or accelerate international operations within the next few years. Like Magnolia, most were led by direct inquiries from abroad, the attractiveness of global markets and an opportunity to turn a profit.

“Younger and smaller franchise companies are jumping into the global market,” says Scott Lehr, vice president of international development at the IFA. “They’re looking at markets where it’s possible to grow sales in double digits. That’s pretty enticing.”

Knowing the Territory

Still, setting up global operations is a “big financial and operations commitment,” especially for smaller chains with limited resources, he says.

Smaller brands can face unexpected challenges in these regions, where a business system developed back home can be difficult to reproduce with limited infrastructure and an unfamiliar business culture.

“Nothing is easy in this,” says Mr. Edwards, whose firm has shepherded dozens of U.S. brands into foreign markets over the past decade.

For starters, franchisers can expect heavy training costs for franchisees and partners who know the local market but might be less familiar with the American approach to brand awareness or customer experience, Mr. Edwards says.

That’s what Pinkberry has discovered. In just six years, the California frozen-yogurt shop has grown from a single location to more than 175 stores in 17 countries—including Bahrain, Jordan and Peru.

Ron Graves, the company’s chief executive, says its business systems are stringently maintained through a full-time global team and a network of handpicked global partners who have experience working with U.S. brands and who share the company’s core values.

“We do our homework,” Mr. Graves says of the process of whittling down thousands of franchise applications to just a handful of capable partners who oversee dozens of outlets across a given region. “We’re not in the business of selling franchises, we’re in the business of finding partners,” he says.

Mr. Edwards says better communications systems and Web-based business applications are making it easier for franchisers to keep a close eye on far-flung operations. Still, he says it’s essential for companies to have boots on the ground in these regions to make sure that a brand is being successfully duplicated and maintained.

Smashburger’s Mr. Prokupek says after the Kuwaiti franchisees are finished training here, company officials will follow them back to the Middle East to oversee the new restaurant, which he expects to launch in late March.

“We want to hit the ground running,” Mr. Prokupek says.

Mr. Edwards, who isn’t affiliated with Smashburger, says that sort of exchange between smaller U.S. chains and international partners can be a boon for the global economy.

“What we’re really doing is exporting American business know-how,” he says. “And that’s exciting.”

Mr. Loten is a small-business reporter in The Wall Street Journal’s New York bureau. He can be reached at angus.loten@wsj.com.

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About Alexander Gordin
An international merchant banking professional with over twenty years of business operating and advisory experience in the areas of export finance, international project finance, risk mitigation and cross-border business development. Clients include foreign governments, municipalities and state enterprises as well as Fortune 500 and small/medium enterprises. Strong entrepreneurial instincts, combined with leadership and strategic skills. Transactional and negotiations experience in over thirty five countries. Author of the highly acclaimed "Fluent in Foreign Business" book and creator of the "Fluent in OPIC", "Fluent in EXIM","Fluent In Foreign Franchising", "Fluent in FCPA",and "Fluent in USTDA" seminar/webinar series. Currently developing "Fluent In ......" seminars and publications. Co-author of the Fi3 Country Business Appeal Indices. Extensive international business development and project finance transaction experience in healthcare, aerospace, ICT, conventional and alternative energy infrastructure, distribution and hospitality industries. Experience managing international public and private corporations. Co-Founded three companies abroad. Strong Emerging and Frontier Market expertise. Published and featured in numerous publications including: The Wall Street Journal, Knowledge@Wharton, NBC.com, The Chicago Tribune, Industry Week, Industry Today, Business Finance, Wharton Magazine Blog, NY Enterprise Report, Success magazine, Kyiv Post and on a number of radio and television programs including: Voice of America, CNBC, CNNfn, and Bloomberg. Frequent speaker on strategy, cross-border finance and international business development. Executive MBA from the Wharton School at the University of Pennsylvania. B.S. in Management of Information Systems from the Polytechnic Institute of NYU. Specialties Strategic Management Advisory, Export Finance, International Project Finance & Risk Management, Cross-border Negotiations, Structured Finance transactions, Senior Government and Corporate officials liason

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