Business consultations

How to Expand a Franchise System Abroad

Good afternoon ladies and gentlemen! I hope you all speak English but I’ve heard you have an   interpreter. If you don’t understand me I will try to speak slowly because I am not a native speaker in English. I am from Germany and I represent the German Franchise Association and a company called Franchise Pool International. The topic today from my side is the same topic but for different people. On one side people who are interested in franchising in general and on the other side people who already have a franchise system here in Bulgaria and want to expand to other countries or people who are interested in international franchise systems and they want to know what they can expect from an international franchisor. That is why I said the topic is A) how to expand a franchise system or B) what to expect from an international franchisor and the easiest is to put it all together in a franchise package and this franchise package I will explain to you.

A little bit about my background. I have been in franchising for many many years. I started with the first co-operation Cooptive in 1982. Then in the 90s I started with a franchise system from Canada so from 1994 I was a master of Uniglobe Travel Company and started as a master franchisor in Germany. In the board of the German Franchise association I have been since 1999 so it is nearly 12 years now and I am responsible for the international affairs which means I am in so many different franchise locations around the world. For example last week I was not far away from here in Belgrade, Serbia. So I do that on behalf of the German Franchise Association. With that I was long time board member in the European Franchise Federation and I am also a member of WFC which is the World Franchise Council. I started in 2006 with a kind of broker business which is called Franchise Pool International. This means I help German companies to go abroad. On the other side I help international companies which are interested to come to Germany or to enter the market by finding a master. And my main job at the moment is an international franchise director for a company called BackWERK. This is a bakery chain, a self service bakery with a fast food concept. We are in 7 countries at the moment. In the ranking in Germany we are number 1 out of 1000 franchise systems we have in Germany. We are very proud about that and we got the award of franchisor of the year in 2011. I am responsible for the international countries, for example at the moment we have masters in Romania, Slovenia, in the UK, Holland, Austria, and Switzerland; altogether in 7 countries. To give you a short idea we sell bread, bread products but also drinks, coffee, and filled rolls to eat in or to take home. How does this looks like? Here, for example, is a shop in London. And you see that in London we did not use the German word BackWERK. We used “Bake and Take” in London. This is, for example, a shop in a train station in Germany and here you see that everything they sell in the shop is baked in-store. We are working with industrial products which are frozen and then the frozen products we put in the oven and after 5 to 10 minutes you have fresh bread and fresh products which can be sold in the store. This is our latest innovation which is now a full BackWERK café, a coffee shop. But this is only an introduction to show you what I am doing and where my experience in many many years comes from.

Now I will be more general and will tell you a little bit about franchising and franchising package. Many people think franchising is like buying a product. No, it is not buying a product. It is to be awarded as a member of a team, a member of a family in franchising. And therefore if you are a franchisee of a system you are not an employee, you are a partner and you should be a partner on the same level as the other partners and as the franchisor because they are all entrepreneurs. Usually as a franchisee you benefit from the long-term experience of a good franchisor and you get a famous brand. Don’t forget it is not always what people are thinking that it is Subway or McDonalds. These are exceptions. But there are so many brands in the world and, for example, to give you an idea, in Europe we have about 20 000 different franchise systems and in the USA they have only 3000. The reason is that all countries like France, the UK, Germany, Italy etc. they have so many homegrown systems and there are so many good systems which are also interesting for a market like Bulgaria. On the other side what I saw on the exhibition is that you also have some attractive franchise systems, what is called “homegrown” business. So people have the opportunity to get local systems or to get international systems.

And what are the prerequisites for a good franchise system? This is what I will explain to you. First of all the elements of franchising is what each franchise system should have. They have a trade name, a trade mark. They offer the franchisees the use of intellectual property, know-how. It is not only a logo, etc. but it is know-how in business practices and know-how in technical methods; it depends on the kind of systems. In franchising in general you divide franchising in three different categories. Usually you have the restaurant or the food business, then you have the retail business and you have the service industry. These are the three major categories and therefore in some systems you don’t need technical methods but you need different kind of procedures, of business practices, etc. and this is what a franchisor usually offers you. And you get assistance: it could be commercial, technical assistance within the framework. The Bakery chain I am representing has 280 shops in Germany and for these 280 shops they have 19 support people who go out to the franchisees and help them control the quality, and support these franchises. This is not a secret; this is a basic thing you need in a good franchise system. And it is not so easy to start a franchise system. Some people think, oh yeah, I have a good idea, I have a good restaurant. Someone asked me if they could do the same restaurant and then they call it a franchise. That is not so easy and that is the reason why many systems fail: because they don’t think about what is necessary to build a good franchise system. And we are talking about two different topics when we are talking about a good restaurant or a good fast-food, or good service concept, but to be a good franchise system it needs a little bit more. And here now you will be shocked as with “WOW”: that is how much you need for a franchise system and that is true. That is a franchise package and this franchise package you see here in 7 columns. As it would be difficult to explain to you on this chart each step so I have made it a little bit easier for you to understand what needs a franchise system in order to be good. If you are looking for a franchise opportunity you should ask your franchisor if they offer all these services or these parts of a good franchise system or on the other hand if you are a franchisor, then you have to check if you fulfill all these obligations you see here on the screen.

And now let’s go a little bit in details. The components of a franchise package are divided in 7 main parts. Number 1 is what a franchise partner is. For example, that’s a franchisee. By the way this is also a system from Germany I represent; this is a system for door and kitchen renovation, a renovation concept. So to get franchise partners you need a system presentation and you need an expansion strategy. A franchisor should know if they only go in a country like Bulgaria or maybe they only look for franchisees in Sofia or they say, “no, we go international!” But where to go international? The easiest way for you is neighboring countries: in Romania, may be in Turkey, may be Greece. These are the neighboring countries which are the easiest way. So you need an expansion strategy. You need a profile of a franchisee or a franchisor needs a profile. The profile means what kind of franchisees is suitable for my system. I will tell you a good example. The profile for McDonalds, this is brand that everybody knows and can imagine what it means, so the profile for a franchisee for McDonalds is never a chef from a kitchen. You know why? It’s very easy: if they tell you this is a typical McDonalds’ hamburger a good chef would say “…no, no, no, I like a little bit more ketchup, a little bit more salt here”, and then the McDonalds’ hamburger wouldn’t be the same. And today if you go here in Sofia to McDonalds and buy a Big Mac it should be the same as in Athens, in Paris, in London, or in Frankfurt. And that is why for example, coming back to the profile of a franchisee, usually in a franchise the franchisees are start-ups. A franchise system should be a system that teaches people how to do the business if they have no experience in this business. A franchise system should have a royalty structure. You always pay a fee, an initial fee, or you pay a percentage of the turnover or a fixed fee, and this is called royalty. The British have now a new world for that and they don’t like to use royalties.  The reason for that is because they have a royal family in the country but internationally I keep this word royalty structure. Then for the franchise partners a system should have partner management. That is what I said before when I said that they were using support people. They are doing meetings with the partner. They try to combine all partners into a big team, in a relationship and I can tell you from my experience in Uniglobe Travel that it was fantastic. We had meetings in Hawaii and the Bahamas, in the Caribbean on a cruise ship. This was in the travel industry and we were sitting together and talking “…what are you doing in your country in India?”, or “…I have a new idea from South Africa” the other had a good idea from Japan. All these franchisors or franchisees together share experience and that is the benefit of a franchise system. Everywhere I was in the world with my colleagues from Uniglobe travel I always learnt something new and when I came home I immediately made a meeting with my people and said we had to change this or that and we tried it. This is the power of franchising. Then you have an advisory board and you have some franchisees who are responsible for marketing, others for new products etc, and you talk to these people or the franchisor talks to these people because communication in a franchise system is very very important. Without communication it doesn’t work.

Oh, let’s see column number 2. In each franchise system we are talking about either products or any kind of service. So what is necessary? When you go in your country or when you go abroad or when you buy a franchise the first question should be is there a demand for your service. And people say, “…oh, yeah, the economy…, although people are not so rich in our country...” There are systems for which there is demand in Bulgaria but there is not in countries like France and the UK. So the question is “is there a demand for this system in the country?” Typical examples are hamburgers or pizza, so when you have pizza systems you have to ask what the uniqueness is. I remember I was on a franchise exhibition and I saw a pizza service from Poland and I said: “what is different for your pizza service? Oh, yeah, our pizza is not round, our pizza is square”. I said, “Wow, that’s a great uniqueness”. It is very difficult for a system like pizza but when you are looking for a franchise system ask where its uniqueness is or internationally it is called USP, unique selling proposition. Is it a proven concept? If they have a franchise system which has one franchisee I wouldn’t say it is a proven concept. But if you see a franchise concept which has been either for 30 years on the market or has 200-300 outlets internationally, not locally. But here in your country your local systems could have maybe 5 or 10 franchisees and then maybe they can have a proven concept which is behind the pilot phase. Now we are again coming to something. When someone starts a franchise, we always tell them that first they have to start with a pilot. Whatever system you have, wherever you go in the world, first you have to have a pilot because many people, especially I am talking about the Americans, I hope no Americans are here in the room, they come to Europe and they say: OK, this system works in America, now we will sell it to Germany, it will work here. No, it’s different. Some Americans think, oh, we will sell a master license for Europe. And you will not believe me how often I explain to Americans that Europe is not one and the same country. Yeah, but Germany and Austria… No, Germany and Austria even though we speak one and the same language, again it is different. And when they look more and more at the map of Europe they see so many languages, and then, for example, in Bulgaria, they see a different writing and they are totally confused. Therefore pilot phase is very important before you start in a country because all our countries have different mentalities, different languages, they have different business mentalities, etc.

What a good franchise system needs is a product portfolio. They need a service philosophy. Internationally we say mission statement. It sounds very good, but if you have service you must tell the franchisee what the philosophy of the system is. They must have a price policy. Of course, by law it is forbidden to fix prices but if you go to, I don’t know how many McDonalds you have here in Sofia, but if you look at how much a Big Mac costs in McDonalds you will see there is only little, little, if any, difference. But officially no price fixing. But you must have a price policy, not talking about fixing but policy. And condition policy also. Conditions for the franchisees. Purchasing policy. Because purchasing power is important for franchising. Back to my BackWERK bakery system: so if they talk to Coca Cola, for example, and say, “we have one shop in Frankfurt”, Coca Cola would say, “OK, here is our price list!” But if we tell them, “look here we have 250 shops in Germany and we would like to negotiate”, they listen to us and we get a discount, we get a cheaper price. That’s purchasing power in easy words. Quality standards: for example, if you are a door renovation company the renovated door in each country from each franchisee should be the same. The franchisor has to give these standards in manuals, in handbooks and tell the people that these are the quality standards. And a franchisor is responsible for innovation, always something new and don’t forget that all systems should always came with new dishes or new ideas. McDonalds came with McCafe. They had a big deal in Germany and now they changed to McCafe. That’s innovation. Also a system cannot stay on the same level for ten years, impossible! Then they will go down or fail.

Now, the franchise system should have good standards for the location. For example, this is a BackWERK bakery in a shopping mall. They should see what the profile requirements for this shop are, should it be in a shopping mall, should it be in a main street or if you have, for example, a language school then you do not need a shop in an A location, you can have it on the second floor or wherever you find something. So location analysis is important for retails systems, it is important and for restaurants. Then equipment: you see all the restaurant of Subway, for example, have the same equipment. This is because on one side it is easy for the customer to recognize this brand and on the other side if you buy for example the equipment for one shop is different price than if you would negotiate for 100 shops. And this is what systems like Subway do. Distinguishing features are also important to tell the people look this is a typical shop of this or that brand. This is also something a franchisor should think about. Real estate concept: systems like my bakery stores or McDonalds have e full concept. McDonalds is the largest real estate company in the world because all the real estate is either rented by McDonalds or is owned by McDonalds. This is also the system which BackWERK has in Germany. All 250 or 70 shops in Germany are rented or belong to BackWERK. This is a real estate concept and it is not good if you put it in the hand of a franchisee as they could find whatever they like. No, you must exactly tell them what your concept is, what kind of real estate is appropriate for your system.

Coming to column number 4: what a franchise package should include is everything that has to do with marketing. International brand name and trade name. Usually every system has a brand mark and a trademark registered in their country. But I have seen in so many cases when systems from oversees come to Germany and we find a master for them and then they realize that they have forgotten to register this brand in Germany. If you have a famous name that you haven’t registered you can do it and if you are lucky nobody else would have done it. Then that’s fine but in many cases this is a problem. But if you have a system here in Bulgaria and you want to go abroad then it is not necessary that you start registering your brand all over the world. No, you should register when you make your expansion strategy. You say OK, my expansion strategy in the next five years is all of the neighboring countries in the Balkan region, or in South East Europe or wherever and then you register your brand in these countries. You don’t need to register it now in China or Malaysia or wherever, but in the countries where you plan to go but before you make the step into the countries. Then in marketing you need corporate identity. This is something most systems have done very good and the marketing companies earn their money with that. Customer target group definition: whatever service, retail, etc especially when you are in fashion retail systems they know exactly what their target group is: ladies between 25 and 26, no, or between 20 and 40 or something like that. And, for example systems, like the renovation system they say: OK, we are looking for private customers with private homes or young customers who want to make renovation. Marketing concepts are important in order to get customers into the shop, or for my service. Franchises need a concept, marketing tools and then strategy of networking: how to get customers repeating customers etc.

Number 5 on my list is management service. What does it mean? A good franchise system should have a management service and the management service starts before someone sells a franchise license. They should have a kind of success planning; nobody plans failures, everybody plans successes. Therefore a better word is to make a business plan, to prepare a business plan, to show the franchisee ok you have to invest this and you have to invest that, you can expect a return on investment after 2, 3 or 4 years. This is something crucial for a successful franchise system. Financial models: this is something which a lot of people discuss whether it is necessary or not. There are franchise systems which cost let’s say 20 000 Euro and then they don’t need a financial model but for this bakery store usually a franchisee in Germany has to invest between 120 000 – 150 000. So 1/3 usually they should have in cash, 1/3 they get form the bank and 1/3 is from a leasing company. So this is a financial model. For example, in Germany BackWERK spoke with Deutsche Bank and made an arrangement with them. Deutsche Bank checked the system, said, OK this is a good system and when the next franchisee comes we only have to check the person and their background and then we agree or disagree. This is financial controlling and benchmarks. Controlling is always something the franchisee thinks”… oh, controlling, I am an independent entrepreneur, nobody should control me!” Yes, it’s important, it’s very important to control not only the quality of the food or the service but also control the success or if they don’t have success. This can be done through benchmarks. For example, in BackWERK we have 250 stores which can be compared so we tell the people: OK, what is your cost of food and this is approximately 40%. And if another franchisee has 50 % then they are doing something wrong. And this is also a benefit from a franchise system because you have other colleagues who do the same job in the same surrounding and therefore you can share this information with benchmarks. In many systems you also have an accounting system or bookkeeping system. It is also very important to have the same numbers on the same place in your accounting sheet because different accountants work in different ways therefore a common accounting system for a franchise concept is important.

It is important that most franchise systems today are IT supported. Whatever system you have you need techniques and computers. Usually many systems have intranet only for a close group of franchisees and they can find to-date manuals. When I started in 1994 I got 27 manuals, you know this was a big box. Today you only get a password and you go into the intranet and everything is there.

Every franchise system in the world has a training concept, a training concept like basic training in theory and practice. In a system like my travel industry system, there was a lot of theory training to understand how to book flights and combinations of destinations, etc. But in a system like these bakery stores we have much more practical training. People go there and they make the sandwiches. I have also done it, it was a lot of fun to make sandwiches and put the bread in the oven and etc, etc. So usually you get e training for the franchise concept itself, whether it is service, retail or a restaurant, about the products and the services. For example when you have a renovations system the people are trained how to renovate a door or a kitchen. Very important in each franchise system are sales because nearly all franchise systems sell something, whether it is a product or a service, yes they sell and the franchisee is a sales person. Therefore they should train in sales and marketing, how to get customers, etc., in IT, whatever the computer system is and in business management. And it is also mandatory for each franchise system to document everything in manuals, handbooks. Therefore the basic training and manuals are part of the training concept.

And now I am coming to the last column in the franchise package. This is called system protection. This is important for a franchisor, and it is also important for someone who wants to buy a franchise because they need to know whether they get a territory or whether they get exclusivity. In most systems they say OK there is no second shop in the surrounding 100 meters, 1000 meters, 10 kilometers. Whatever the system is you should see or the franchisor should take care of the trademark registration. These are all issues about the franchise protection. The system should seek customer protection. It is important in some systems that if you have a customer, your colleague in the same system cannot contact this customer. Therefore customer protection is also important. A franchise agreement, this is what all franchise systems have but sometimes it is good, sometimes not so good. The franchise agreement is important also when you are looking over the borders. If you have a system from Bulgaria and you want to go to the neighboring countries then you need a master or an international agreement and now you are coming to a different level because the agreement is in different languages. You can have it in two languages; this is what I have seen in Russia, for example. When you make a deal with Russia, you have on the left side the Russian language and writing and on the right side you have the English or whatever the language is. So you have different languages. Then you need an international lawyer to help you. System protection, franchise fees, royalties, this is also a kind of protection because if a franchisor doesn’t earn money then they cannot serve you, or serve the franchisees of the system. And the quality control mechanism secures that the system standards are the same in all franchise outlets.

This is an overview of a franchise package and look what guys: it is so easy! Everything you need to know I have given you in 30 minutes. Thank you very much!

                                                                                                                                                                           

Author:

Rolf Kirst

Rolf Kirst