Expanding to International Markets

Increasingly, U.S. franchisors are parlaying their expertise and their trademarked concepts in the international arena. Many franchise systems, especially in the restaurant sector, have become dependent on international revenue streams to keep them thriving and profitable. In late 1998, however, economic turmoil in several key foreign regions, such as Russia, parts of Latin America and much of Asia, has caused U.S. franchisors to grow more cautious. The franchise most known for its international expansion, McDonald’s, is expected to continue its expansion efforts and will probably continue to succeed because of its experience and strong discipline in overseas operations. But many other systems, without McDonald’s resources, are taking a “wait and see” position until conditions improve.

The top world regions for U.S. franchisors (outside the U.S.), according to Marcel Portmann, Director of International Development and Global Marketing at the International Franchise Association (IFA), are North America (Canada and Mexico), Western Europe and Latin America. He explains that Canada and Mexico are top choices for expansion because of geographic proximity and language similarity. In fact, Canada is the most popular foreign location for U.S. franchisors, with Mexico as the second most popular. Western Europe is popular because of the sophistication of its market and similarities to the U.S. Latin America is attractive for other reasons. This region has many untapped markets with great potential. In addition, many Latin American nationals travel back and forth to the U.S., so that the franchised brands are already familiar.

Philip Zeidman, a franchise attorney specializing in the international sector at Rudnick, Wolfe, Epstien and Zeidman, basically concurs with Portmann’s assessment of key outside markets for U.S. franchisors. His comments on the currently troubled markets are worth noting. Regarding the Asiatic regions, Mr Zeidman says, “Most franchisor clients will defer and restrict their short-term goals for now and may even close some stores, but [they] are not pulling out.” The current situation in Russia is perhaps even more troubled, and as a result Mr. Zeidman doesn’t envision any franchisor going into Russia in order to open its first store in the near future.

New international growth markets for the longer term are China and India, according to Zeidman. He says, “China is probably the biggest growth market for our lifetime.” He believes any major franchise company will put China at the top of its list. India also shows great promise for franchise expansion because of its status as the second largest market in the world. Besides the fact that English is the common business language in India, a rising middle-income population of about 150-250 million can’t be ignored. The country still hasn’t completely shaken off 50 years of bureaucracy, however, and this can cause a multitude of problems for both the franchisor and master franchisee.

The biggest change in international franchise markets, according to Zeidman, is the proliferation of franchise litigation. Only a few years ago, there was little franchise regulation outside the U.S. However, laws to regulate franchising are now being put forth in countries like Japan, Korea, Australia, Indonesia and Malaysia.

Further Information on International Opportunities

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