Feature Articles: International Franchising
International Franchising Considerations
by Erik Premont, Consolidated Restaurant Operations, Dallas, Texas.
International franchising is a fascinating universe. Technology has provided the entire world with the ability to communicate real time with basically any entity. There are many companies contemplating international expansion; however many companies fail in their first attempt because they neglect the dynamics of tropicalization and soulprinting.
Tropicalization and soulprinting: since neither word clears Microsoft Word’s spell check, let’s take a closer look at both.
Tropicalizing a concept is the fine art of adapting a franchise system to a specific foreign market while protecting the brand. It is the subtle balance between making certain changes - some of them substantial - to a system, while respecting the legacy of the brand and staying faithful to the authenticity of the company’s culture. These types of adaptation range from legal issues to modus operandi to real estate, lease negotiation, construction, operations, training, and even employee relations; while delivering the same guest experience to the end users. During each of these steps, the decision that needs to me made is: “how much do we need to tropicalize?”
Legal issues. One may be protecting the franchisor’s intellectual property and securing proper trademark registrations and domain. Some details include checking to see how your company's names and slogans translate into the vernacular of the new host country - do they have a different meaning? Is there a slang meaning for your name? Does the abbreviated name mean something different? Make sure to ask local counsel about this before spending money protecting your intellectual property. You may want to ask their teenage sons and daughters too…
Modus operandi: One may be the frequency of royalties made to franchisors. Many countries close their books monthly therefore franchisors may adapt their accounts receivable module and budget expectations to monthly transactions rather than weekly. Tax treatment on transactions is another big one. For instance, withholding tax rates are 15% in Brazil and 10% in Mexico. Furthermore, documentation and filings are required each time a franchisee makes a periodic payment. Failure to anticipate these business practice adjustments may hurt the international growth at the critically important early stage of the relationship. Either the franchisor will be in a position in which its costs of collecting fees end up being higher than the royalties likely to be generated during the first year, or the international franchisee will be smothered by fees and end up not being profitable. Both cases are disastrous.
Real Estate: My wife and I were shocked when we saw the different looks and shapes of the various TGI Friday’s locations in Moscow when we were in Russia. Land acquisition processes vary country by country and so do commercial real estate prices. Especially in more populated areas, large casual dining venues need to be flexible and grow in height rather than in width. Two and three-story locations are not unusual. Any restaurant executive can imagine that this very reality has a tie-in to top line, operations, training and bottom line.
Operations: How about product substitution. Sometimes it is a no brainer. Pepperoncini peppers can be substituted for Jalapeño peppers in Monterrey, Nuevo León, or Habanero peppers in Mérida, Yucatán. Sometimes it requires a little more work. I remember one instance in my previous career when two weeks before the scheduled opening of the first store in São Paulo we found out that there was no Cheddar or Swiss cheese distributed in Brazil! Going through an extensive competitive analysis with the Master Franchisee, we discovered that queijo Minas and queijo Mussarella de Búffala were two types of local cheese that people loved. We verified that their distributor could provide the same quality 52 weeks a year with little price variance and then required the Master Franchisee to write a procedure on storage and shelf life. Finally the Master Franchisee filed that procedure into their filing cabinet in Portuguese, translated it in English and filed it onto the franchisor’s corporate intranet. That assured replicability in the country and protected the brand in the United States.
Tropicalization is a very delicate matter. Failure to tropicalize may lead to a rejection from the local public; yet too much tropicalization may result in losing control of the brand. CRO brought Mexican restaurants to the Middle East with the proper amount of tropicalization. El Chico Dubai has been such an extraordinary and unique success story that we are now building El Chico Cairo. Now with a partner who has acquired the rights for 35 restaurants in the UK and Ireland, future has never looked so promising.
Soulprinting. Our entire life, from living in a family to going to school to finding a job to raising our own family, is based on building and nurturing relationships (or soulprinting). The same logic applies to international franchising. Successful domestic franchise sales sometimes happen via the scenario of candidates flying in, attending discovery day, flying back home on the same day, reviewing the franchise agreements with their accountants and attorneys, and then overnighting the executed franchise agreements with a check for the initial franchise fee; however one can seldom achieve the same success in foreign markets. International franchise prospects will require more attention. They will invest months in getting to know a potential franchisor and the individuals who represent them, and they will expect reciprocity in due diligence done by the franchisor. Once an international prospect has been duly qualified, the franchisor must accept their soulprint invitation and should expect to travel to their country to personally meet them and their family. Failure to do so may be interpreted as a soulprint rejection Many companies found out the hard way that talking business too soon in the game (or a soulprint rejection) has caused them to lose a deal; no matter how motivated the prospect originally was, how strong the brand was or even how mutually profitable the deal originally looked on paper.
Soulprinting involves one of my favourite activities: personal conversations about family and personal interests during late-night meals in the prospect’s home - or in a restaurant. In the latter case, visiting the competition (if they have a presence in that market) is a good idea. These meals are typically accompanied by spirits or hot tea (depending on the local culture) and often take place way past our American dinner time. Every single international transaction in which I have personally been involved was the result of a long, mutually respectful relationship-building process. It is a fact: people buy from people. As with most business ventures, researching the target market is critical to success, and doing so in most every foreign country will include understanding the importance of cultural nuances as well as the business climate. These investments of time, along with the proper interpersonal behaviors will be well worth it. And the beauty of this is that all of us can benefit from soulprints whose roots stem from 7,000 miles away. We all can benefit immensely from embracing each other’s cultural differences.
We all have a story to tell. Adelaida Cuellar’s story of growing a county fair tamale stand into an internationally recognized food chain is one that has moved many people around the world. Telling her story has helped break the ice, built cross-cultural bridges, and allowed prospects to see us as people first. Talking business afterwards is always a piece of cake – or a piece of flan as we are in the Mexican food business. ¡Salud!
Erik J. Prémont, Director of Franchising, Consolidated Restaurant Operations, Dallas, TX
Acknowledgements:
Tony Foley, CEO, World Franchisors, West Palm Beach, FL
Jeff Kolton, Principal, Franchise Market Ventures New York, NY
Carl Zwisler, Partner, Gray Plant Mooty, Washington, DC
Marc Gafni, Author and Corporate Consultant
