Nancy Rathbun Scott

It's a Big World Out There
Printed in USA Today
by Nancy Rathbun Scott
In The Graduate, a middle-aged businessman whispers a single, powerful word into Dustin Hoffman's young ear: "Plastics."
Today that word might well be "franchising," particularly franchising beyond U.S. borders. American franchisors are rushing overseas for obvious reasons: there's a world of opportunity out there.
Take China, for instance-1.2 billion people and only 50,000 officially-registered private cars. To franchisors, the stats conjure up dealership dreams, plus opportunities for car repair, service, and parts distribution.
And then there's India, where, 870 million people already offer a huge-but still vastly underdeveloped-consumer market to multinational franchisors in the soft drink, fast food, clothing and lodging industries.

From humble beginnings
In the 1960s, Americans began to export "business format franchising," which provides the owner with an entire system for doing business. Since then, burgers, donuts and ice cream have been feeding Canada and the United Kingdom, Australia, Japan, and Europe. But now there are more exotic fish in the sea: eastern block countries, Asia and South America, for example.
Phil Klote, business development director at CII, Inc., which will sponsor the upcoming American Franchise Exhibition in Long Beach, September 12-14, explains. "Eastern Europe is going through an incredible growth stage in countries like Poland and Czechoslovakia. Southeast Asian markets are big, including Viet Nam. China has been very strong of late. South America has always been a good market. And Russia is the next hot bed. It turns out that all of those Communist party members had money. It just wasn't in rubles."

Why the rush?
As developing countries shift from an agricultural to a service economy, a new middle class emerges. Television feeds consumer desire and travel creates demand for product uniformity. Meanwhile, market saturation in the United States casts a seductive glow on overseas possibilities.
"Where there is little room for the franchisor to expand [in the U.S.], the most common solution is for the franchisor to establish the franchise system in a foreign country," says Canadian franchise attorney Alexander S. Konigsberg.
Describing how the franchisor mind works in "Making the Decision to Franchise Internationally" in Franchise Update, Konigsberg says market saturation isn't the only reason companies leapfrog, however. Some cross over because international franchising promises a quick earnings fix. Others can't resist the glamor of going international. Sometimes a franchise company simply caves to pressure from eager foreign investors or goes ahead to shut competition out of a foreign market. While these motives aren't the best, market saturation, careful research and geographic proximity do make excellent reasons to move outside U.S. borders.
Robert Titus, president of Minuteman Press, says his company's plan to grow internationally, particularly in the Caribbean, Mexico and the United Kingdom, is an extension of the growth strategy, not a substitute for domestic expansion. "We have more than 800 stores in the U.S., but we have absolutely not reached saturation. There are still hundreds of small markets we haven't covered."
Fortunately, there's plenty of business to go around. Prospective business owners worldwide are attracted to franchising's inherent promise: support and training offered by the franchisor, a well-proven concept, an established name, and lower business start-up risk. That's why Klote expects many international investors among the 10,000 who will hob nob in Long Beach. "This is going to be a quality crowd," he says.

What's brewing? That depends.
In a balance of trade twist, America exports far more franchising than it consumes. Restaurants are a notable example. "Food is very tough to bring to the U.S. from outside," says Klote.
Luckily for American franchisors, however, the rest of the world stands eager to consume things American. From Saudi Arabia to Spain, familiar hotel logos dot the landscape. With some adaptations to the local palate, American franchised food systems also do well, as do car rental franchises.
"The biggest reason is brand identity," explains Joseph DiNicola, executive vice president of Payless Car Rental System, Inc. "Payless is bringing a U.S. brand identity to the investor."
With its number of domestic and international units already split roughly 50/50, Payless views the overseas market as key in its expansion strategy. "We've been aggressive overseas since 1991, but that has stepped up in the past two years."
Klote agrees that American brands are a big deal to foreign consumers. On the other hand, the experience of novice franchisor Coffee Cavern indicates that international investors are willing to look at a sexy American concept, even if it doesn't come with a big name.
Coffee Cavern is just two and a half years old and it has only two company-owned stores in operation, but the novel concept has been attracting interest from Djakarta to Paris. How did it happen?
After a career in architecture, design and general engineering, president Steve Selover wanted to "do something different." Selover's drawing board turned out coffee houses that look like the inside of a cave. While subterranean espresso may sound strange, Selover says investors are mesmerized by the experience. "The store is really more about fun than food or drink."
He isn't ready to disclose all the details of Coffee Cavern's international expansion yet, but Selover will say that the concept has "caught the eye of the world and we're running with it. We have memoranda of understanding to open three stores in Indonesia. We're taking to people in Montreal, London and Paris. We have 18 contacts in Russia-two of them serious."
The majority of inquiries, however, are coming from-you didn't guess it-the Middle East. "Someone there owns a coffee shop that sells only single and double cappuccinos and coffee. That's it- no buns, no rolls, no croissants-and that store still makes $2 million a year."

Going abroad takes money and patience
Franchising overseas may be alluring, but it's neither cheap nor easy, says Klote. In China, for example, franchisors are expected to donate a percentage of the business to various agencies of the Chinese government. "The People's Army is a big holder. People who want to go to China have accepted this."
Other countries seem so remote that franchisors fear wasting money managing the first few units. Until recently, Australia has seemed prohibitively far to many American franchisors, although the internet is cracking distance barriers, says Klote. Lower airfares don't hurt either. "Normally, when support staff goes to the East coast, it costs $500 to $600," says David Louy, vice president and franchise director at Los Angeles-based Closet Factory. "For another $300 we can send staff halfway around the world. Today, it's a relatively small world and it's just not that much harder to take care of franchisees in Australia."
Cultural differences in many countries present yet another challenge, particularly to the food industry. "It may be difficult to meet the palate of a given country." And that's not all. "It also can be very difficult to find approved suppliers in a given country or even in a region," Klote says.
All true, acknowledges Steve Selover, although he isn't focusing on the difficulties. "I wouldn't call them problems. They are challenges, yes. But, for almost everybody, the challenges are a matter of either time or finance."

Partners ease the burden
The easiest way to navigate choppy international seas is at the helm of a master developer from the targeted country. By partnering with one, big, local investor, the franchise company achieves the rapid market penetration that makes franchising work.
Sometimes, international partners bring other benefits. During the U.S. trade embargo against Russia, for example, expansion-minded McDonalds wasn't allowed to do business with the Soviet Union. A northern neighbor-McDonald's Canada-took over, elevating the golden arches in Russia.
As popular as master licenses may be-and master arrangements are by far the preferred method-some companies still choose to sell units the old-fashioned way-one by one. That's the approach the Closet Factory has taken in English-speaking countries. "In Australia, Canada and New England, it's easy to communicate," says Louy. "When we are in non-English speaking countries, however, we do master franchise. It's simply the logical way to do things."
Whether through single sales or under master licensing agreements, franchising will exert ever greater influence over business systems worldwide, predicts Klote. "The world is getting smaller and franchising is getting easier."

Laboring in Russia
When McDonald's was looking to staff its new Moscow location, the executive in charge of hiring wanted skilled employees who were fluent in two languages. Prospective employees also needed to know about computers and be enthusiastic.
McDonald's had placed a tall order and personnel firm owners Igor Khukhrev and Elena Novikova knew it. "Those characteristics were impossible to find in a society in which people were trained to be unemotional, where paychecks were guaranteed, and where competence was unimportant," says Elena.
But the Russian entrepreneurs, who have the only privately-owned employment agency in a city of more than 10 million people, were determined to fill McDonald's bill. After all, the operating model for their own company, Ancor, is based on the system of excellence and service imported from another American franchisor, Express Personnel Services.
Igor had learned about Express Personnel Services in 1992. Visiting the U.S. as part of a business exchange program, Igor met the franchise owners of the Express operation in Rochester, Minnesota. The Russians were duly impressed. "It is so wise. Every detail is so developed. We admire it, " says Elena. Equally important, they liked Express' corporate culture. "We found a lot in common in our business attitude and philosophy."
After two weeks of training at Express headquarters in Oklahoma City, an agency agreement followed. Ancor acquired standard franchisee support services, and a little more. "They needed a building in Moscow and some communications equipment. We financed those for them," recalls Robert A. Funk, Express' CEO and chairman.
The relationship has worked beautifully. Novikova eventually managed to fill McDonald's order, and went on to do business with such multinational firms as Volvo, Nissan, Philip Morris Companies, Inc., Shell, General Electric, Eli Lilly and Merck & Co. Today, this international version of Express Personnel Services numbers 13 offices in Russia, and counting.