INTERNATIONAL FRANCHISING: CONSIDERATIONS FOR FRANCHISORS & FRANCHISEES

The first issue is local law. Every country has a unique legal system and some countries may also be members of regional organisations with laws that exist in parallel with, or in some cases, supersede local laws. An example is COMESA (the Common Market for Eastern and Southern Africa), which has its own competition and consumer protection regulations.

The extent to which franchising is regulated differs from one country to the next. While some countries require systems to be registered, in others the franchise relationship is purely, or at least largely, contract-based. In certain countries, the legal environment is even less structured. While there might nominally be laws governing issues relevant to franchising, the enforcement mechanisms are often non-functional. In Mozambique, for example, the Competition Act provides for a competition authority, but the authority itself is not fully operational.

 

Other factors that may be unique to a particular market include tax and exchange control laws, and indigenisation or affirmative action legislation. South Africa is not the only country with laws designed to empower and protect previously or currently disadvantaged sectors of the population, or those who would struggle to compete with large foreign investors.

‘Cultural’ or local market conditions and preferences may also be a major factor in determining how and where to best launch a concept, and whether the offering needs to be ‘tweaked’ to appeal to the local buying population. Perhaps the best-known example is McDonalds in India, which offers vegetarian meals to cater for local demand.

The viability of the product offering in the local market must also be considered. North America and Western Europe, for example, will likely display a greater demand for high-end, luxury products compared to less prosperous countries. The state of existing competition and whether there is room for yet another offering in that market sector, is an important consideration for the franchisor.

In light of the above it is advisable for foreign franchisors to appoint a local master franchisee; someone who is familiar with local conditions and has sound relationships with local regulators, suppliers and other stakeholders and who can provide the necessary operational expertise. This is especially true in international relationships where the franchisor is reliant on the local licensee to supervise operations on the ground.

Considering all these factors it is understandable that established companies with a proven track record and independent resources are regarded as ideal candidates for the role of local licensee. If the proposed master franchisee or area developer already has other brands in their stable, whether licensed from other franchisors or owned outright, consideration must also be given to whether this may prove problematic.

The main disadvantage is that the licensee may focus on some brands at the expense of others. This problem would be exacerbated if the licensee held licences for several competing brands. To prevent this the franchisor could include provisions in the agreement that prevent the licensee from holding licences with brands that directly compete with one another. It is important that the deal be structured in such a way as to optimise the benefits and minimise the downside for both parties. One of the first decisions a franchisor has to make when expanding into a new and unknown territory is whether to appoint a master franchisee or an area developer. The distinction between the two types of arrangements is set out in the table below.

Some of the advantages of appointing an established franchise company as a local licensee are:

When negotiating a local master franchise or area developer agreement, applicants should also consider the cost of the agreement. Given the exchange rate and the fact that most foreign franchisors calculate their own costs (and subsequently their fees) in their own local currency, the cost could be substantial and therefore better left to established local franchisors who are better able to bear the cost. Moreover, the suitability of the franchise offering to the local market and the size of the market must be carefully considered when undertaking performance targets. The master franchisee must take care not to agree to unrealistic targets, both in terms of the number of outlets to be opened or the target revenue to be generated.