INTERNATIONAL FRANCHISING: TAKING ON THE UNITED STATES
by Callum Floyd


Many franchisors are attracted to the United States (US), the market most responsible for franchising’s popularity today. Franchise success stories like McDonald’s, Burger King, 7-Eleven and Marriott Hotels highlight the enormous scope for expansion within the US economy.

The US population (287m) and [purchasing power parity or PPP] per capita GDP (US$36,400) is huge compared to culturally similar countries like Britain (60m; US$26,518), Canada (31m; US$30,766) and Australia (20m; US$ 27,566). New Zealand, by contrast, has a population of 4m, and PPP per capita GDP of US$21,994 per annum. That size difference helps explain why a number of US franchisees have larger operations than many New Zealand franchisors.

The United States is also attractive to expanding franchisors due to the high level of franchising awareness and development. Popular estimates suggest franchised operations account for anywhere between 33 and 50 per cent of all US retail sales, and overall sales totalling more than 1.5 trillion dollars. Furthermore, franchising is reportedly utilised by companies in more than 75 business sectors.

Yet while rich rewards exist for successfully entrants, there are complex business and legal challenges franchisors must overcome.

The US is a highly competitive and sophisticated market. Many sectors are saturated (Quick services restaurant franchisors, in particular, would be especially ambitious to contemplate US expansion).

Expanding franchisors will need a first class business concept that exhibits distinct [and preferably several] unique selling propositions. US consumers are rarely starved for choice. Consequently, care must be taken, as an apparent niche may exist for a very good reason. Franchisors must also be prepared to adapt their concepts at the country, state and/or regional level.

The US legal environment pertaining to franchising is one of the world’s most challenging. Legal requirements are complex due to the dual existence of federal and [varying] state-level franchise regulations. At the federal level, the Federal Trade Commission (FTC) specifies stiff disclosure requirements, which must be made to prospective franchisees. Additionally, over a dozen states (including many of the largest commercial centres) have developed their own more rigorous disclosure rules and regulations. Obtaining specialist advice is absolutely essential.

Almost without exception, the franchisor should always establish a pilot unit to test and refine the franchise concept. Key questions then follow, including where to located the pilot operation, and why. Pilot operations also require staffing, and allocations should provide for a mix of local and franchisor specialists. Operating will provide valuable learning and likely require important adaptation that, in turn, requires high-level decision-making.

Expanding franchisors should also seek strategic advice to determine the most optimal franchising form for US entry and expansion. Accordingly, there are a number of alternative organisational arrangements to select from. In broad terms, common franchising forms for foreign entry include:

1. Direct franchising – involving a NZ company (or US subsidiary) granting rights directly to operating franchisees in the US.

2. Area development – where area developer franchisees are provided rights to develop large territories with scope for multiple units. Individual franchises are typically managed by salaried managers, rather than owner-operators.

3. Regional subfranchising – involving subfranchisors being granted rights to develop whole territories by attracting, recruiting, managing and monitoring subfranchisees or operating franchisees.

4. Area representation – an area representative is granted rights to offer operating franchises within a territory, on behalf of the franchisor. The area representative will also typically provide operating franchisees with ongoing support, although the franchisor maintains a direct relationship with all unit-level, operating franchisees.

Not surprisingly, US expansion is expensive. While the rewards for successful expansion are very large, franchisors entering the United States invariably require much greater financial and managerial investment, and time, than anticipated.

Due to the level of challenge and investment required to successfully enter the United States, many New Zealalnd franchisors begin the internationalisation process by first targeting other markets, like Australia and United Kingdom.

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