Since franchising is based on the principal of replicating a business multiple times, there is – at least theoretically – no reason why a franchise has to be restricted to one area or even one country. For example, Canadian coffee shop Tim Hortons is preparing to launch its first stores in the UK, joining a long list of now familiar franchise networks, including McDonalds, Subway and Domino’s Pizza. And it’s not just networks moving across the pond: many UK brands are expanding in Europe, as well as venturing further afield into places like China and Dubai.
The reason why so many franchises are choosing to do this is obvious: international expansion means access to new franchisees, customers and revenue streams. But how they go about doing it can be more complicated.
Routes to international markets
There are several routes open to a franchisor that chooses to operate internationally. The first and perhaps simplest method is for the franchisor to operate directly in international territories. The franchisor grants franchises to franchisees in the local area, either directly or, more commonly, through a subsidiary or associate company set up for this purpose. The advantage is that the franchisor retains direct control over its franchisees and, significantly, the franchisor gets to retain all of the franchise fees without having to pay a cut to a middleman.
While this approach seems attractive at first glance, the franchisor does risk not being familiar with local culture and laws in the new area. It can also be difficult to properly support franchisees and enforce the franchise agreement if franchisor and franchisee are based in different countries. In light of this, the direct route tends to be appropriate only where the new area is legally and culturally very similar to the original country, for example, the US and Canada or England and Ireland.
To overcome the risks associated with a lack of local knowledge, the franchisor will often work with a partner from the new territory. This can be done in a number of ways, most commonly by granting a master licence to the partner who will be responsible for establishing and growing the network in the local area. This will normally include recruiting and policing local franchisees, although in some instances the partner will themselves operate franchised outlets.
For the franchisor, one of the benefits of this approach is that they’ll be able to exploit the partner’s local knowledge. In addition, the burden of recruiting, supporting and policing franchisees in another part of the world is lifted – or at least shared. The main downside is that franchise fees will have to be shared between the partner and franchisor.