by Simon Lord & Win Robinson
last updated 11/09/2009
Lost In Translation
by Simon Lord & Win Robinson
last updated 11/09/2009
Back in 1996 a South African franchise called King Pie, which already had 200 outlets in its home country, opened its first overseas outlet in Manukau City, Auckland. The company planned 15 outlets in Auckland alone and a year later had six, but things were already going wrong. Within another year or so, outlets were closing and franchisees were taking legal action. The New Zealand master franchisee reportedly fled back to South Africa leaving a number of unsettled debts behind him. What went wrong?
The King Pie franchise clearly had a successful formula. It had good systems in place and a good product. But when it came to its first attempt at exporting, it made the same mistake as so many other franchises moving internationally. It didn't do proper research into the local market and it didn't devise a proper entry strategy.
Those mistakes were exacerbated by the fact that although the master franchisee they appointed here was himself a recent South African immigrant and a successful businessman in his own right, he lacked the experience and the skills necessary to create a workable and successful franchise network in an unfamiliar country. He knew little of the food industry, let alone the intricacies of site selection, lease negotiation or other vital areas such as franchise management. He had seen a great franchise working in his native country and thought, ‘There's a gap in the market in New Zealand for a really good pie franchise.' He was right about that, as the Australian company Jesters has since proved, but sadly he didn't have the necessary knowledge to exploit the gap - and his franchisor didn't have the experience or the strategies to help him avoid the pitfalls.
The surprising thing about this story is how often it has been repeated, in one form or another. A great, well-proven franchise comes to New Zealand. It has huge confidence and high hopes and starts off with a bang, but a year or two later it's all fizzled out. It's an experience shared by some superb franchises too: Kwik Kopy, Lenards Poultry and Aussie Pooch Mobile are all award-winning brands in Australia but failed to take off here. And, of course, it goes both ways. While a few Kiwi franchises such as Fastway Couriers and Harcourts have found huge success over the Tasman and beyond, they are very much the exceptions.
So why do good franchise brands so often get lost in translation from one country to another? And what can franchisors do to ensure that their own export ambitions are successfully achieved?
The Seven Deadly Sins of Franchise Exporting
No matter how good a franchise system might be at home, exporting it into a new market with new tastes, laws and competitors is not a simple process. Here are our ‘seven deadly sins' of franchise exporting.
1. Franchisors fail to research their planned market sufficiently thoroughly, or leave it to an inexperienced local master franchisee to do so - as in the King Pie example. The result is frequently failure or, at least, a much slower start than would otherwise have been possible.
2. Franchisors and local masters fail to use local experts to create a proper entry plan. Employing a local lawyer to convert the franchise agreement into something compliant with local law is not enough. A full entry plan must address not just legal and financial issues but structural, territorial and other matters.
3. People make assumptions that where things aren't obviously different, they must be the same. For example, one overseas café franchise snapped up a site near an Auckland suburban station without bothering to check how many people actually use the trains. Their rivals were in stitches.
4. Franchisors fail to check out the market positioning of local brands. The niche occupied by the franchise in its own country may already have been filled - or may not even exist - in another. In the mid-90s, several Australian home services companies entered the New Zealand market only to find that the number one spot was already filled by Green Acres - a company that didn't exist in their home country. Ten years later, Green Acres is still more than twice the size of its nearest competitor here.
5. Franchisors and local masters fail to adjust marketing to local conditions - not just products, photography or language but also approach. Look at the changes that New Zealand Natural has had to make to its marketing - and even store layouts - in the Middle East in order to work there. This problem is often worse, not better, when franchises move between English-speaking countries. If New Zealand and Australia spoke different languages, companies moving between them would take more care adjusting to local conditions.
6. Franchisors appoint an inexperienced or under-funded master franchisee or partner and then fail to provide them with the specialist training they will need to replicate the franchisor's business in another country. Too many franchises do little more than put national master franchisees through ordinary franchisee training. That does not equip them for the multiple roles required of a franchisor.
7. And the cardinal sin: franchisors or master franchisees fail to set up a pilot operation to test market acceptability and supply lines over a reasonable period before appointing franchisees. This is so important that a number of franchise associations in Europe and the US are now addressing the issue. They take the view that the responsibility for making a format work should be taken by the master franchisor or franchisee, not by individual unit franchisees. ‘It doesn't seem to us to be right that (unit franchisees) should be taking the risk of adapting a business to a whole new country's market,' says Brian Smart, director-general of the British Franchise Association.
These are important lessons for anyone thinking of importing or exporting a franchise. Remember this: buying or selling a master franchise in another country is no guarantee of success. It's only once multiple outlets are up and thriving that you can pat yourself on the back and say ‘this is a workable international franchise'.
Creating An Effective Entry Plan
Regardless of whether you are exporting a franchise from New Zealand or importing a franchise from overseas, there are four essential steps in preparing and developing an entry plan that will avoid the seven deadly sins. These are:
- The Strategic Plan
- The Legal Brief
- System Documentation
- Recruitment Documentation
Step 1 - The Strategic Plan
International franchising requires foreign market research and much preparation. Accordingly, a whole series of activities and decisions must be undertaken before establishing on a foreign shore.
The Strategic Plan consists of three interrelated phases: Situation Analysis; Feasibility Study; and Implementation Plan.
The Situation Analysis requires gathering information and research into both the market of entry and into current operating data of the home franchise. This information will allow assessment of the potential of the business under various franchise structures.
The Feasibility Study should list the expansion objectives of the franchise and will identify and specify the optimal business format. There should be analysis and evaluation of the organisational form options. The commercial framework of the optimal franchise structure to meet the objectives should be worked out. The roles and obligations of all parties should be identified and costed into the financial modelling as well as the establishment cost and development. Cash flows and forecasts need to be produced.
The Implementation Plan should in essence plan the roll-out of the franchise into the market place. It should include the proposed territory structure and protocols, identification of training and support systems to be provided to franchisees, the support office structure and staffing and, very importantly, a detailed profile of the ideal franchisee. The development of a comprehensive recruitment programme and a detailed communication and reporting procedure with specifically identified key performance indicators will also need to be finalised.
Step 2 - Legal Brief
A detailed legal brief should be drawn up to give to a specialist franchise lawyer who can draft the appropriate franchise agreements.
Details of the commercial and operating environment of the entry country also need to be gathered, digested and slotted into their appropriate places in the comprehensive plan. Proper legal plans must be put in place for such things as protecting the company's intellectual property, securing consistent supply lines, complying with tax and government regulations and insurance. A check of legislation must be carried out to ensure that there are no impediments to operating your type of business in the entry county.
Once the franchise format and method of franchising has been decided upon, Stage Three can be undertaken.
Step 3 - System Documentation
This step involves documenting the franchise system into a set of franchisee manuals appropriate to the country concerned. These should set out in great detail how the franchisor requires franchisees to operate the business being franchised. Franchisees receiving the manuals will look on them as their guide to success.
There is a temptation to alter the home country manuals in a superficial manner. Certainly the home franchise manuals can be used as a guide, but the person writing the entry country manuals must be documenting the system that has been especially designed for that country. This may be quite different to the home country's systems, especially if a different franchise format is being used.
If a master franchise method is used, it is important that a specific manual should be produced for the master franchisee so that correct procedure is followed. This does what a franchisor manual does for the home country; it allows for the consistent operating of the franchise support office and becomes a very important management tool as the franchise grows. Specific training should be provided for any master franchisee based upon the knowledge contained within the manual.
Step 4 - Recruitment Documentation
Recruitment documentation needs to be comprehensive and written with much care. The objective is to recruit franchisees who fit the profile that has been defined in the Implementation Plan.
It is very important to recruit the right type of franchisees. In fact, the success formula for a franchise business is:
- Get the format or structure correct.
- Get the right franchisees on the team.
- Put the right support programme in place.
It's a simple formula but the devil is in the detail. Once again, this is an area where inadequate research or inadequate planning can cause the downfall of the whole venture, so taking on experienced local advisors with a good track record in the country concerned is vital. To an experienced franchisor such caution may seem expensive or unnecessary but, as King Pie and other examples have demonstrated, few things are more expensive than failure.
Franchising Is Not Just For Franchisors
Finally, while the idea of franchising overseas is likely to come easily to companies which have already franchised within their own country, it should also appeal to non-franchised companies. Franchising offers all sorts of businesses the opportunity to exploit their intellectual capital by leveraging their know-how or business knowledge in other markets.
Of course, as the above demonstrates there is some work to be done in assembling that knowledge into a commercial proposition but there are a number of major advantages to be gained as companies like New Zealand Natural, Fastway Couriers and Harcourts have proved.
Franchising enables you to work with a dedicated company committed to the best interests of your brand on the ground in the target country. They will have invested not only a great deal of time in your business but will also have paid an upfront fee to you and will have committed to an establishment investment and continuing ongoing royalties. These investments are considerable so they will be paying full attention and working hard to make your brand a success.
Executives of non-franchised New Zealand companies should acquaint themselves with the possibilities by taking the time to learn more about the franchise business configurations. McDonald's, with its 31,000 restaurants around the world, may be the most obvious example of the power of franchising, but so are 90% of the world's major hotel chains, service stations, financial service companies and many other examples.
Yes, exporting must be planned and implemented properly, but remember - most other countries that you will enter will have substantially bigger populations than New Zealand. As a result, it follows that the returns can also be very exciting. It's worth taking a good look at.
This article first appeared in Franchise New Zealand magazine Volume 16 Issue 01
Note: The South African King Pie company has changed hands since 1996 and now has a different approach to international franchising. It requires master licensees to belong to the specific country in which the franchise is being started and has specific personnel assigned to assist overseas franchisees. The company was named Franchisor of the Year by the South African Franchise Association in 2006 & 2007.
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