KIWIS GOING GLOBAL
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December 2010 - How realistic is it for New Zealand-based franchises to dream of global expansion? Simon Lord talks to two companies on the export trail and takes some advice from the experts
On my way back to New Zealand after a visit to a franchise expo in the UK, I arrange to meet Stuart Deeks of Esquires Coffee Houses in Dubai. He wants me to see Saudi Arabia, but there’s no time on this trip. The only trouble is that, when I get to Dubai, Stuart has had to go to Korea. No worries, the Kiwi franchise community is a small one and I am met instead by Chris Mason, founder of Burger Fuel and now Dubai resident. Over the course of a fast and furious tour of the city, we visit the first Esquires and Burger Fuel outlets in the Middle East, see many familiar brands and talk about the potential for New Zealand franchises everywhere from China to Iraq. I finally catch up with Stuart in Auckland, where he has returned for a week before heading away again. When you’re taking a franchise overseas, be prepared for a lot of travelling!
According to the latest survey of franchising, 23% of New Zealand franchisors who responded are currently franchising internationally while another 12% plan to expand overseas in the next 12 months. One of the best-known is New Zealand Natural, which recently entered its 23rd country and was named Exporter of the Year in the Westpac New Zealand Franchise Awards. Next on the ice cream empire’s expansion list is Nepal – a far cry from the hot, sandy atmosphere and air-conditioned
luxury of Dubai.
But how have these Kiwi brands managed to establish themselves overseas, and how should those seeking to follow in their footsteps proceed? ‘Cautiously,’ is the advice from Adrian McFedries, co-founder and non-executive director of DC Strategy, who specialises in international franchise expansion.
‘Too many franchises start their international expansion programme when they get an email from overseas expressing interest in their system and the dollar signs appear in their eyes,’ he says. ‘They think drawing up a master franchise contract and charging a $250,000 fee will cover it, but that’s not a global expansion strategy. Many millions of dollars have been spent by some of the world’s largest franchises in entering new markets and even the best can get it wrong. Subway initially struggled in Australia, McDonald’s struggled in France and Starbucks has found tough local competition that has made life difficult on both sides of the Tasman.’
Adrian believes that there are three key non-negotiables for any franchise planning international expansion. These are:
- Having strong cash flows and profitability
- The ability to remove a key senior management person from head office
- Domestic market strength
‘Sadly, these factors are usually underestimated and take a back seat when the emotions of going international become entrenched,’ Adrian says.
International expansion involves more than the costs of trademark registration, finding a local partner and establishing the first operation, warns Adrian. ‘The cash flows from the New Zealand operation need to be strong enough to face the reality of possible failure in an international market, as well as the possibility that the domestic market may slow. Entering any overseas market with an undercapitalised operation (including the local partner) is as damaging as appointing an undercapitalised franchisee in the domestic market.’
Many New Zealand franchises find it hard to generate enough cashflow locally to fund overseas expansion. Fastway Couriers moved in to Australia first to build up cashflow before going global, while Chris Mason and his business partner Josef Roberts took Burger Fuel public to generate the necessary funds. Esquires has proved it’s possible, though at a cost. ‘Initially, every single penny got ploughed back into the business,’ Stuart says. ‘To enable it to happen, we appointed a CEO in New Zealand (currently my brother Lewis) to continue support of our existing business locally, which allowed us to expand in the international market whilst ensuring continued stability and growth in NZ. This has freed up my time so that if somebody contacts us from one of the areas that we think are viable and their credentials check out, then I can get on a plane at relatively short notice and go and visit them. In my previous career I did business all through the Middle East and parts of Asia, so I understand how things work. We engaged local agents to help us find people and I appointed a regional operations director for the Middle East, Nizar Al-Ali, who has spent 25 years franchising food and beverage in the region and knows everyone. If we get a serious enquiry, Nizar can be in front of them within 24 hours. To have a local guy who speaks the language, knows the business and is respected in the region is invaluable – but it costs. When we went to the Korean franchise expo, there was the cost of the stand, the air fares, the accommodation, the translator – the whole thing cost $25,000 for three or four days. Then there’s the cost of negotiating, registering trademarks, the franchise agreement… You can’t just go and be an international franchisor; you’ve got to invest hundreds of thousands.’
But money is not the only factor that affects a company’s ability to franchise internationally. ‘A successful export strategy requires the franchise to be able to have a key senior management executive focus exclusively on international growth,’ says Adrian. ‘That’s a reflection of the challenges and horsepower required to make international expansion successful. Sadly, too many approach the international scene with no more resource than that used for domestic expansion. The reality is that there are often many years of information gathering or visits before the results are being registered as signed deals. Enabling key personnel to focus on this often triggers the appointment of a new CEO or general manager for the local business.’
In the case of Burger Fuel, it was founder and managing director Chris Mason who took up the challenge. ‘When we opened our first store in Dubai I spent some time here, then I was travelling over every three months, then every six weeks… It was all becoming too difficult, especially with a young family at home. I was managing director at the time and Josef was executive director so we split the roles. Now Josef runs New Zealand and Australia and I’m working on the Middle East. Dubai’s going very well and Saudi is really taking off, but you have to have feet on the ground to make that happen so I moved here with the family about six months ago. I’m an operations kind of guy, I like creating new stores then leaving them in safe hands to run.’
Adrian’s third non-negotiable is domestic market strength. ‘There’s a lot of debate about when a franchise has sufficient domestic strength to enable it to expand successfully overseas. Is the measure turnover, market share, number of outlets? In my opinion, that’s the wrong focus. Two identical franchises with the same number of outlets and turnover in New Zealand might go to Australia where one is successful and the other struggles. Why?
‘The measure of readiness for international expansion is not solely the output or size of the franchise operation in its home country – it’s more the infrastructural development and operational capability within the group. Going overseas too soon or in an opportunistic manner are common mistakes,’ he says. ‘I’d say around 85% of franchises from Australia and New Zealand that try to export their systems fail to capitalise on their potential for international market expansion. They might say “We’ve got master franchise arrangements in 15 countries” or whatever, but how many of those countries are producing real revenue and a return on investment for the franchisor?’ Or, as Chris Mason puts it succinctly, ‘At the beginning, expenses are facts – revenues are dreams. You have to put in the hard yards to help each master franchisee get past the tipping point, first for them and then for you.’
Adrian points out that the growth of the Internet has increased the volume and ease of international enquiries. ‘A reactive approach which says “here’s a good enquiry, let’s go here” has the highest risk of failure,’ he points out. ‘A proactive approach which identifies good potential markets, researches their similarities and differences, looks at the competition and the financial models and then seeks to find the right partners locally stands a far higher chance of success. The proactive model still has execution risk, difficult decisions and reactive moments but is based upon a solid foundation and a solid strategy that enables significant focus on specific countries over a sustained period of time.’
Stuart Deeks agrees absolutely. ‘Yes, we get emails all the time from countries that are not on our list. We’ve had approaches from, say, Mexico but we don’t believe that’s the right move for us right now so we've declined them. We’ve focussed on the areas we’ve researched and can support and where we believe we can find the right partners.’
But how do you find the right partners? Stuart and Chris both agree that it takes time and careful research. ‘The success or otherwise of a new market is very much dependent on the calibre of partners you appoint,’ says Chris. ‘In the Middle East, especially, lots of companies buy concepts that just end up sitting on the shelf. They get enthusiastic about the concept then reality sets in. You have to find partners who don’t just have the money but the back end ability, the marketing, property, IT and other expertise to make it all happen. The good thing about having gone public is that it gives you the credibility, the confidence in your governance, to attract serious operators.’
The other key factors in a local partner are contacts and influence. ‘In many countries, without the right contacts you’ll find it difficult to get the sites you want in the locations you want,’ says Stuart frankly. ‘We have been very fortunate in the partners we have attracted for Esquires. In Saudi Arabia, our partners are one of the top ten trading families in the country and that deal covers 35 stores there. We’ve just signed an agreement with the royal family in Bahrain for 15 stores, our partners in the UAE are a huge company with everything from hotels to electronics and they will open 65 stores, and so on.’ Not every deal has gone so smoothly, though, as Stuart freely admits. ‘In Egypt, we had a problem where the partner we appointed signed the agreement and then basically disappeared. He didn’t have the money he appeared to have and tried to raise investment on the basis of the agreement. We’d researched him through New Zealand Trade & Enterprise and various other sources but it still went wrong – even having someone on the ground didn’t help. Those things happen sometimes, it’s not the end of the world – you just have to keep going.’
But Esquires’ biggest deal to date is a 250-store contract in China. ‘Our partner there is an investment company that is a joint venture between the Yunan regional authorities and the Chinese government,’ says Stuart. ‘The stores there are going to be in the most prestigious locations which you can only get through having the right partners. We’ve opened the first four stores there and they are beautiful, absolutely stunning. We used our store designer from New Zealand, John MacDonald from Design Environments, and chose to export shopfittings and signage for the first stores from here. The Bahrain store is also being shipped out of NZ. All of our Esquires-branded products were formulated here two years ago and are also exported into the international markets we have developed.
‘It’s taken longer than we anticipated and probably cost more than double but strategically we’ve entered China, we’re working with a very powerful partner and we’ve established the relationship and the trust between us.’
Relationships take time to develop. ‘In China, you need to go there at least ten times and build up a relationship over lots of visits,’ Stuart says. ‘We took on consultants in China to help us; I read all the books and learned the Chinese way and we invested a huge amount of money and time in travel and visits, dinners and gifts, because if you don’t make an effort to understand their way of doing business and respect it, you won’t get the respect back and the partnership just will not work. You hear things like “the signing of the contract is the beginning of the negotiation,” but it doesn’t really hit you till you’re out there doing it. We’ve learned all those lessons and there is a huge amount of trust and understanding between us now – the chairman of the group and I get on really well and we are partners in a very serious enterprise with the potential for hundreds of stores.’
New Zealand is a long way from anywhere, but local companies investigating overseas markets don’t need to start from scratch. Stuart and Chris both talk enthusiastically about the support they have received from New Zealand Trade & Enterprise (NZTE).
‘We have actually got on to a NZTE programme which helps turn growing New Zealand companies into exporters,’ says Stuart. ‘Apart from all the help in researching new markets and the credentials of possible partners, you get an account manager – a specialist advisor who’s done it all before who will coach you and introduce you to people. Through them, we’ve also had excellent help from the embassies. In China, the New Zealand ambassador spent the whole day with us at the opening and that was very important in terms of status. The ambassador in Saudi Arabia has been similarly helpful and we get a lot of support from NZTE’s regional trade office in Dubai. If you know what to ask for, there’s a lot of help available.’
Chris Mason adds that being from New Zealand is a positive advantage in the Middle East. ‘In many countries here they won’t really accept US concepts so being from New Zealand we’re the good guys. Our style is a little unusual – we make gourmet burgers and our brand is pretty high energy with a bit of grunge to it, and they’ve really taken to that. In Saudi, our partners will recoup their investment in the first store within 10 months! A recent trip to a NZTE conference in Jeddah really opened our eyes to the contacts and knowledge they have in the region, and being part of the Beachheads programme through NZTE has been invaluable in the Middle East/North Africa.’
Although we met in Dubai (‘The U-turn capital of the world,’ grins Chris, as he deftly negotiates yet another of the 180° degree turns that are a regular feature of driving in this strange and wonderful city) and both Burger Fuel and Esquires established their first Middle Eastern stores here, it’s really a stepping stone for the rest of the region and beyond.
‘A lot of New Zealand franchises regard Australia as the obvious place to start exporting, but it’s a hugely-developed market and we saw more immediate potential elsewhere,’ says Stuart. For example, Saudi Arabia wasn’t hit by the recession and has huge desire for acceptable western concepts. The New Zealand government has been pretty smart – we have just signed a free trade agreement with Saudi Arabia and removed all visa requirements so it’s easy for Saudis to visit New Zealand, unlike Australia, the UK or the US. They love that and they love our clean, green image so it makes a perfect place to introduce our brands and products. It’s a dream come true if New Zealand franchisors would just get over here and learn about it!’
But for any franchisor looking at the opportunities in Saudi Arabia, China or even just across the Tasman, there’s a word of caution from Adrian McFedries: ‘Take advice – and make sure it’s good advice. The idea of going international has so many unknowns that the perception of anyone who appears to be ‘in the know’ is appealing, but there are many cowboys in the international space who are simply out of their depth. It’s an expert area and tremendous value can be created by sourcing the appropriate input from the correct people.’ Esquires is a case in point, having appointed local recruitment consultants, franchise consultants, lawyers, translators, cultural consultants and even someone to help them work with the NZTE network.
‘Travel also broadens the mind, and there is no substitute for visiting the intended countries of expansion,’ says Adrian. ‘If you think you haven’t got time, what type of commitment do you really have to potential business partners in that country?’
And that one word – commitment – sums up much of the advice that Adrian, Stuart and Chris have given. Good New Zealand franchises can find ready markets overseas but they need to develop the right strategy, take the right advice and put the right people on the ground. That means spending a lot of time in the air, as Esquires and Burger Fuel are finding out, but it can be done. Just ask New Zealand Natural, Fastway Couriers, Harcourts and Les Mills!
This article was first published in Franchise New Zealand magazine Volume 19 Issue 4. Click here to see a fascinating graphic from New Zealand Trade & Enterprise showing how New Zealand’s export markets have changed over the past 100 years.
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