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.