Andrew Brattesani, HSBC UK head of franchising, explains what a franchisor should consider when taking their brand overseas
For a company seeking expansion, franchising is a compelling strategy for growth alongside the more well known methods of organic and acquisition.
It can provide a cost effective and lower risk way of breaking into new markets, helping to drive growth and creating diversification for the parent company. This is particularly the case for companies looking to expand internationally.
Sector of prosperity
Franchising is booming across the UK. Boasting over 900 brands and contributing more than £17 billion to the UK economy, it is a sector of prosperity. Over 93 per cent of franchise businesses are profitable, according to industry figures, but taking brands into overseas markets is a little behind the curve.
Approximately a third of UK franchisors have a presence overseas, ranging from some of the largest and most well known brands such as Marks & Spencer, to more specialised providers, such as tax and accountancy specialists.
Despite the opportunities, some obvious barriers exist that can act as a deterrent. Understanding and complying with local legislation and language barriers are obvious reasons, while finance concerns and management resource are also often cited as hurdles to overcome.
Factors to take into account
So what factors should franchisors consider when making the step into international markets? All companies making the move need to ask themselves some simple questions.
Which market is right for your business? For example, where is your product or service most likely to succeed and which markets are going to enable the franchisor to most eff ectively manage the international operation?
Many of our customers will venture into more well known markets, such as Europe and the US, before branching further afield.
Who should you hire? This isn’t necessarily in terms of franchisees, but for your corporate company in your home market. Expanding overseas can be labour intensive and it’s important not to lose focus on your successful domestic operation, so should you hire somebody specifically to support the overseas business?
How do you protect your brand? This doesn’t only relate to how the service or product is delivered in an overseas market, but how the brand identity itself is protected, including factors such as the trademark and logo.
Do you need to customise your business for a foreign market? Most franchisors will need to adapt their model slightly for different markets. McDonald’s menu offerings, for example, change between countries to better reflect the tastes of those markets, such as the Chicken Katsu Burger in Japan and Chicken Maharaja Mac in India.
A key consideration is what model of franchise you want to operate. Many of our customers enter into a master franchise arrangement, where one partner with knowledge of all the local laws, customs, trends and political environment will operate the franchise, often working with sub-franchisees to grow into that particular market.
Foreign master franchise owners pay an upfront fee to acquire a designated geographic area, selling franchises, collecting royalties, training the owners and overseeing all other related matters. In general, a specified number of franchises must be agreed for the exclusive right to use the business model in an entire country.
There are a number of benefits to this approach. One key relationship reduces management time, marketing expense and ensures a more consistent representation of your brand across the market. However, selecting the wrong partner to work with can be of vast detriment to the success of an international venture.
Alternatively, other customers prefer setting up a network of independent franchisees, which can be labour and management time intensive, but enables a more handson approach with individual outlets.
Test the market
Whichever route a business chooses to follow, we’d recommend companies open at least one or two corporately owned outlets first. This enables the company to test the market and properly ascertain demand for its products or services.
Establish these sites in the less obvious markets to properly test demand. For example, when Canadian food brand Tim Hortons opened its first store in the UK, it chose Glasgow, rather than London. Trying to establish an operation too quickly can put too much strain on the company, hindering its chance of success. We advise all our customer to be realistic about growth and aspirations.
Connections are important; making sure you make the right connections with people and organisations that have the best interest of your business. HSBC can help connect franchisors with not only local franchise partners, but with the professional network needed to establish an overseas franchise network.
We are taking this successful UK model, where we have seen significant growth over the past 10 years, into our international network. Reflecting heightened franchising activity in overseas markets, HSBC has appointed new heads of franchising in the United States, Canada, Mexico and France.
We see franchising growing in many countries and HSBC is well placed to work with domestic and international brands, providing support and sharing experience to help drive cross border expansion of franchises both inward and outward.
Reaping the benefits
If companies can get it right, franchising can reap many benefits for the franchisor. HSBC has worked with a number of UK franchise brands that have gone on to internationalise their offering as a result of the success they’ve enjoyed in the domestic market.
One of them is children’s swimming school Water Babies. Launched in 2002, it teaches around 45,000 children in almost 600 pools through 56 UK franchises.
Its first overseas move was to Ireland, launching in Dublin in 2009. It went on to become the franchise’s fastest growing territory, attracting 1,000 clients within its first year. Since then Water Babies has expanded into the Netherlands, Canada, New Zealand and China, with plans to open in Germany.
Alongside its ambitious expansion plans, Water Babies has developed additional revenue streams through the sale of related products, such as bath toys, towels and swimwear, and stunning underwater photography of their customers’ little swimmers.
Water Babies demonstrates that it is not just those consumer facing brands in retail or food that can make a success of international franchising. Franchisors can achieve success in almost any sector.