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Small Businesses of the World Unite!

….We have nothing to lose but our chains!  

A Small Business Manifesto by Ray Hays, www.rayhays.com  

Bottom line, it’s up to small businesses to save the world. Big business, financial markets and politicians have lost touch with the common man.  

They’ve also lost touch with reality. They worship false deities – mysterious and faceless entities, with names like DOW, S&P, DAX and Hang Seng. When the financial gods become angry, the politicians and Central Banks attempt to appease them through complex rituals in which they manipulate magic potions with names like the debt ceiling, interest rates, financial regulation, fiscal policy, money supply and stabilization programs. They posture and debate how these potions should be mixed, while the world’s economy sits on the brink, awaiting some miracle to emerge from the voodoo fog bank. 

So what can we do as small business owners? 

For one thing, spend more time working on your business and less time worrying about the economy. It seems that the only certain thing in the financial markets is uncertainty.  Over the past week, we’ve heard it on the news ad-nauseam: “The market shows signs of uncertainty.” Really? What the heck does that mean? Just tell me how I can retrieve my retirement account as it swirls down the toilet. 

Then some talking head comes on the TV screen and explains that the uncertainty might be attributed to unemployment indicators… or the debt ceiling… or the Standard and Riches credit rating… or rumors that a camel passed gas in Oman. 

We stand back and scratch our heads, inwardly embarrassed that — despite our years of business experience, and regardless of our academic pedigrees — we have no clue what they’re talking about. Join the club of ignorant masses. Unless you are one of the minions in the financial markets, you are probably mystified by the swirling market forces that shape the destiny of the global economy. 

However, in the real world, business is not about some abstract financial benchmark or macroeconomic policy. As small business owners, we know that business is about people: our employees, our customers and our community. It’s about hard work and good management. It’s about simple concepts, like sales, costs and profits. 

Who will be our economic savior from the economic winds of uncertainty?

Politicians? Stock market gurus? Central Banks? The banking sector? The real estate sector? Multinational corporations? China? God? Superman? … Superheroes aside, I would place my bet on the small business sector.

 Look at it historically. Prior to the industrial revolution, small businesses represented the heart of economic development in most countries. Before the days of “big business” and the stock market, small entrepreneurs built the foundation on which the industrial and financial giants of today stand.

However, today, big business and politicians are tied to the hip with global financial markets. (Or is it vice-versa?) Comparatively, small businesses have significantly more freedom and leeway from the market. Sure, small businesses are impacted by global market forces, including inflation, interest rates, labor costs, fuel prices, etc.  Sure, economic downturns destroyed many small businesses, which were defenseless to the onslaught.

Yet small businesses are more nimble than their large brethren. We can adjust more quickly to market risks or opportunities. A small business can re-brand in a week, whereas it takes United and Continental Airlines over a year. We can completely change our business strategy without worrying about the perception of shareholders and our stock price on Wall Street.

That said, increasingly small businesses are burdened with chains of the global economy, which prevent us from change and strip us of our independence.

It’s time to take control of our destinies. Long Live the Small Business Revolution!

Yes, small businesses DO have the power to change the global economy. Let’s take the example of the U.S. market. According to the Small Business Administration, small businesses (fewer than 500 employees):

    • Represent 99.7 percent of all employer firms.
    • Employ just over half of all private sector employees.
    • Pay 44 percent of total U.S. private payroll.
    • Have generated 64 percent of net new jobs over the past 15 years.
    • Create more than half of the nonfarm private gross domestic product (GDP).
    • Hire 40 percent of high tech workers (such as scientists, engineers, and computer programmers).
    • Are 52 percent home-based and 2 percent franchises.
    • Made up 97.3 percent of all identified exporters and produced 30.2 percent of the known export value in FY 2007.
    • Produce 13 times more patents per employee than large patenting firms; these patents are twice as likely as large firm patents to be among the one percent most cited.

Definitions and perceptions on small businesses vary. For example, in Europe a small business is identified as fewer than 50 employees compared to 500 employees in the U.S.  Some consumers perceive franchises as “big business chains” that kill off small business competitors. In reality, a significant majority of franchisees are small businesses that are locally owned. In terms of franchisors (the franchise headquarter companies), the majority of them are also small businesses. The big players, such as McDonald’s and UPS, are more the exception than the norm.

Definitions aside, small businesses play a critical role in the worldwide economy. Think about it this way. If the small business sector could add 10% more jobs, the U.S. economy would erase the rise in unemployment since 2008, which improves consumer spending, which grows retail sales, etc. In short, shifts in the small business sector can make a big impact on the world economy.

Okay, I’m on-board with the small business revolution. What’s our goal?

Break the chains of the financial markets!  What are the chains that shackle our small businesses?

Big government or a big business clients – If more than 25% of the revenue of your small business comes from on government or big business, you are chained to the market.

Big business vendors or suppliers – If your business relies on big businesses suppliers, you are chained to the market.

Big banks – If your small business is dependent on large banks – for small business loans, etc. – then you are chained to the market.

Financial services – If your small business is in a sector that deals with financial services or commodities, you are chained to the market.

Real estate – If the health of your business is impacted by booms or busts in the real estate market, you are chained to the market.

“Discretionary” consumer products and services – If your revenues comes from non-essential products and services that are subject to discretionary income, you are chained to the market.

Which chains weigh down your business? How heavy are they?

Realistically, most small businesses will always be connected to the market to some degree. As a small business owner, what chains can you break and what chains can you weaken? How can you minimize your dependence and exposure to big business and financial markets? Possible solutions include:

Completely reinvent your business – If you are in real estate or financial services, either get out of the business or diversify into other sectors. Ask yourself:  If I were not in real estate or financial services, what other business would appeal to me? Don’t wait. Start building your business life boat now.

Introduce new products and services – Ask yourself what new, innovative products and services you could introduce, which are recession-proof? For example, if you own a catering company, you could begin to sell affordable school lunch packages for kids.

Replace your big business and government customers with small business customers – Ask yourself, if my big customers disappeared tomorrow, what other types of small businesses could I service? This may require changes to your products and services, as well as changes to your strategy of marketing and sales. Don’t wait for those big clients to disappear. Do it now!

Replace your big business vendors with small business vendors – This may be difficult, and it may cost you more money, but ask yourself: As a customer, am I more valuable to a big vendor or a small vendor? A small vendor is more likely to provide you with personalized service, they are more likely to refer clients to you, and they are more vested in the success of your business. Is that worth paying a premium for the product? In most cases, the answer is “yes.” Most importantly, you will help another small business owner to break their chains to the market.

Cut out the big company middle man – One advantage of the global economy is that small businesses are better able to simplify their supply chain. Ask yourself: Why can’t I just go to the source for products? For example, if you sell uniforms that are made in China, do you really need to purchase through a large distributor? Why not work directly with a small manufacturer in China? Again, you will have more control over your supply, better leverage and in some cases, better pricing.   Tip: If you have no idea of how to import, you may wish to engage an international business consultant to help you identify overseas suppliers, and engage a small, licensed customs broker to manage the import process for you.

Replace your big bank with a small bank – Like all small businesses, small banks are more flexible than big banks. Small banks are hungry for your business, and relatively speaking, your small business will be a much larger client to them.

Hire more employees – During a downturn, fear of “uncertainty in the market” prevents small business owners from hiring. Step back and evaluate your values as an employer and the mission of your company. Do you believe that your employees are your most important asset? Many good employees are on the market today. If you add two or three… or ten “top-performers” to your team, what would this do for your operational capacity or your sales growth? How can do your part to reduce unemployment and still prosper as a business?

Entrepreneurship, innovation, customer service, employee loyalty, family values…  These are the enduring hallmarks of a successful small business. With these values in-mind, it’s time to level the playing field and allow small businesses to chart their own destinies.

Now, small business revolutionaries… Go forth and save the global economy!

Article Copyright © Ray Hays 2011 All Rights Reserved. Electronic distribution is permitted with citation of author’s name. 

International Franchise Invasion: The Looming Battle for the U.S. Market

By Ray Hays, www.rayhays.com

My last article addressed the erosion of U.S. franchise dominance globally. Clearly, American concepts still hold the premier position in the global franchise sector. However, in response to the American franchise juggernaut, some foreign-based franchise concepts rose to the challenge. These home-grown franchisors staked a claim to their national markets and even expanded into multiple international markets over the last few decades.

No doubt, many international franchisors salivate at the prospect of entering the United States, the world’s largest consumer market. Some foreign-based franchise concepts are already established as highly successful brands in the U.S.  Think Benetton, The Body Shop, Kumon tutoring, Cartridge World and Tim Hortons coffee. That said, the percentage of foreign franchise concepts is still miniscule compared to the thousands of entrenched American franchisors in the U.S. market.

Why aren’t more foreign franchises operating in the U.S. market?

The lack of foreign-based franchise concepts in the U.S. would seem to negate the prospect of a future flood of foreign franchises onto American shores. A common theory is that the barriers to entry cause the U.S. market to seem unattainable for foreign franchisors. This assumption, however, is flawed. In reality, these “barriers” are more accurately described as obstacles or speed bumps. At best, these obstacles will slow (but not stop) international franchises as they approach along the yellow brick road to the U.S. market.

In short, it comes down to perception versus reality.

Perceived barriers create real but irrational fear among foreign-based franchisors. However, most of these fears will diminish as foreign franchisors become more familiar with the U.S. franchise sector. Some of these barriers are overblown due to a lack of understanding, and some of these barriers are purely psychological. A few examples include:

  • American customers – Some foreign-based franchisors buy into the negative myths of the American customer. Unfortunately, American consumers and business clients are often poorly perceived outside the U.S. Many of these myths are misguided stereotypes of the U.S. consumer culture. Among other characteristics, American customers are often viewed as anti-foreign, narrow-minded or just plain ignorant. Those perceptions aside, the U.S. has a large and diverse profile of customers, and a franchise concept need only attract a small niche of loyal customers to succeed. Regarding the anti-foreign culture and “buy American” mentality, this is largely baseless hype. Foreign brands are firmly rooted in the U.S. market, and this is unlikely to change. Benetton and The Body Shop are examples of foreign franchises that are now established brands in the U.S. Major foreign brands also abound in other sectors… BMW, Honda, Louis Vuitton, Sony, Airbus, etc. The American market has historically embraced foreign brands across many sectors and across many socio-economic groups. Franchises are no different.
  • U.S. litigation – Foreign franchisors have heard horror stories about the litigious nature of the American market, including both customer lawsuits and franchisee lawsuits. Look at most American Franchise Disclosure Documents (FDDs), and you will see a slew of lawsuits disclosed in the Litigation section. True — even a foreign franchisor that follows all the rules is likely to get sued by a U.S. franchisee or customer at some point. That said, why has litigation not stopped U.S. franchisors? Simply put, litigation is a manageable risk with minimal business impact. If a franchisor follows the rules and does business in good faith, they will generally prevail in the lawsuits. Yes, foreign franchisors will need a good U.S. legal team to succeed in the U.S., but that’s just a cost of doing business.
  • Market size and complexity – The U.S. market is massive, diverse and daunting to many foreign franchisors. Let’s face it. Entering the U.S. market is a big step that will require more than money and business plan. The risk of failure is very real. However, if you look at the risk-return ratio, the potential payoff will nearly always outweigh the risk. Yes, the U.S. market is huge, but nearly every American franchisor started small in their local market and grew from there. In fact, most foreign franchisors are better equipped for success than early-stage U.S. franchisors. Generally, a foreign franchisor already has a proven concept in multiple markets, a history of success and the financial resources for expansion. It’s true that the size of the U.S. market is daunting. The United States is the elephant of franchise markets, but it’s just like the old adage: “How do you eat an elephant? …One bite at a time.
  • The list of perceived barriers goes on… investment requirements, operating expenses, U.S. competitors, etc. A closer analysis will show that many of these barriers are easily overcome through reasonable planning, solid business processes and simple common sense.

Real barriers to entry also exist for foreign-based franchisors entering the U.S. Ironically, many of these same barriers also exist for U.S. franchisors expanding into international markets.

  • Regulation and legal costs – Yes, the U.S. franchise sector is highly regulated, and a franchisor will need to budget appropriately for legal expenses. Additionally, the creation of a Franchise Disclosure Document, registration of trademarks and other administrative processes of setting up a U.S. franchisor entity is time-consuming. This is true of American franchisors or foreign-based franchisors, so in many ways, it is a level playing field. Additionally, some non-U.S. franchisors have already experienced the learning curve of regulated franchise markets in other countries. As a result, they may have resources and know-how that can be applied in the U.S. Of course, their legal documents will require significant revision (possibly a re-write) by an experienced U.S. franchise attorney. However, the same argument can be made in reverse; U.S. franchisors entering international markets also face legal barriers and costs in many countries. Again, it’s just an inherent cost of doing business.
  • Language barriers and localization – It is no coincidence that most successful foreign franchise concepts in the U.S. have arrived from Canada, Australia and the U.K. As with any international business, communication within a franchise network is critical. This will require English-speaking management (preferably native English-speakers) to be the key liaisons with the U.S. franchise network. Moreover, if a foreign franchisor does not have documentation in English, a significant amount of translation and localization will be required for franchise manuals, forms, business tools, web sites and business software. It is a mammoth and unavoidable project. Then there’s the need to localize products, services and marketing to fit the local U.S. market, which is another very real challenge. That said, translation and localization is a common obstacle that was faced and overcome by most successful international franchisors. 
  • Corporate culture  – This is a commonly overlooked barrier. Most international franchise executives will tell you that one of the primary challenges is differences in corporate culture. In particular, U.S. franchisors and international master franchisees have a history of corporate culture clash. Similarly, foreign franchisors entering the U.S. will encounter differences in corporate culture. As with any international partnership, significant rifts in culture and philosophy often lead to failure. The disastrous merger of the DaimlerChrysler is a textbook example of the role that corporate culture plays in partnerships
  • Control – Related to corporate culture, the issue of control plays a key role in an international franchise expansion project. Will a U.S. master franchisee (or multiple U.S. regional master franchisees) dilute the control of a foreign franchise concept? How can the foreign franchisor maintain the integrity of their brand in the U.S. market? Should the franchisor set up a U.S. subsidiary? The answers to these questions will depend on several factors, including the nature of the franchise concept, the selection of master franchisees, the ownership of franchisor and the overall mission and strategy of the franchise system.

It’s a learning process. A touchy topic among international franchise executives is the high failure rates of U.S. franchises in international markets, especially during the 80s and 90s. The historical landscape of American franchises in international markets is littered with failed franchisees and master franchisees. Gradually, many American franchisors improved their international franchise strategies based on past mistakes. Foreign franchisors entering the U.S. are wise to heed these lessons as well.

Barriers to entry exist for franchisors entering any global market, including the U.S. To navigate these challenges, foreign-based franchisors would be wise to engage U.S. franchising experts, who understand the pitfalls and best practices of the American franchise sector. The investment in franchise attorneys, consultants and American executives will pay off in terms of time-to-market and risk mitigation.

As more foreign-based franchises continue to expand into the U.S. and attract a loyal following of American customers, the perceived barriers of entry will dissipate. This will lead to new and innovative international concepts that are willing to take the leap into the American market.*

The international franchise invasion is inevitable; in fact, it has already started. The real questions are: How quickly will foreign-based franchises expand in the U.S.? ..And how many will be successful?  Time will tell.

What do you think?

  • What role will foreign-based franchises play in the U.S. market over the next decade?
  • What are the catalysts that will drive their entry and expansion?
  • Are foreign-based franchises good for the U.S. economy?

 I will address these questions and others in a future article, Foreign-based Franchises in America: Invasion or Rescue?

 

*Statements in this presentation that are not historical facts are forward-looking statements based on current predictions of future events as indicated by my crystal ball and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. The crystal ball is fully responsible for the content and accuracy of such statements.

Is Franchising the Last Bastion of American Business Leadership?

By Ray Hays

Blog: www.rayhays.com

 American concepts have historically dominated the franchise sector on a global level. During the late 20th Century, franchising, along with Hollywood, played a pivotal role in the projection of the American culture and brands. We can find McDonald’s from Moscow to Melbourne, Curves fitness centers from Caracas to Cape Town. The domination of American franchises seems all but unstoppable.

 However, a few decades ago, a quiet insurgency emerged in the form of non-U.S. franchise concepts. The manifestation of this rebellion can be seen in four concurrent trends:

 1.       Boom of national “home-grown” franchises outside the U.S. –

  • In Belgium, Mister Minit began franchising in 1964 and became the leading franchise in Belgium, and an early European franchise leader.
  • In Japan, Family Market launched in 1981 in direct competition to 7-Eleven.
  • In Spain, Telepizza launched in 1987 and quickly dominated their national market

2.      International expansion of non-U.S. franchises –

  • In the 1980’s the international expansion of Italian franchisor Benetton made it a household brand in over 100 countries.
  • During the 1990’s India’s NIIT training franchise entered about 40 new countries.
  • In 1998, the Spanish nutrition franchisor Naturhouse began international expansion, quickly entering 18 countries into the 2000’s.

 3.      Entry of foreign franchises into the U.S. –

  • UK-based The Body Shop expanded quickly in the U.S. franchise sector in the 1990s.
  • Established in 2001, Argentina’s ProntoWash car wash franchise quickly entered the U.S. market in 2002.
  • Founded in Australia, Cartridge World entered the U.S. in 2003 and has nearly 600 U.S. franchises today.

4.      Foreign acquisition of U.S. franchise brands –

  • The U.K.’s Bass group acquired the leading U.S. budget hotel brand Holiday Inns in 1988.
  • In 1991, a Japanese franchisee acquired controlling shares of the 7-Eleven parent franchisor.
  • In 2009, French multinational Sodexo acquired the second-largest U.S. senior care franchise, Comfort Keepers.

Despite the foreign franchise insurgency, the U.S. position remains pre-eminent in the franchise sector, at least for now. This U.S. dominance is even seen in the home markets of highly developed European franchise concepts.  According to the website Franchise Europe, of the top 100 franchises represented in Europe (in number of locations), 34 are American-owned franchises. Interestingly, if you compare the top 500 franchises in Europe, only 45, or less than 10%, are American franchises.

This suggests that the U.S. is leading the pack at the top of the European market (about 1000 units or more), but European concepts dominate their markets among the medium and small franchises under 1000 units. Similar trends are seen in other global regions as small international franchises enter the market.

Think about it. Franchising is a unique sector in which U.S. companies continue to dominate on a global scale. U.S. franchises have not given up significant market share to foreign companies, at least compared with the American auto industry, financial sector and increasingly, the IT sector.

In short, the U.S. has maintained its competitive advantage in the franchise sector for more than 50 years. This might be attributed to American innovation or perhaps the marketing power of American brands. However, the advance of the non-American franchise concepts continues.

 What do you think?

  • Can the U.S. maintain its domination of the franchise sector?
  • Will we see more foreign-owned franchises on Main Street America?

My next article will touch on the second question:

What are the facts around foreign franchises entering the U.S. market, and can they succeed on the American franchisors’ home turf?