Franchising – The Right Model for International Expansion?

Many of our customers with a strong national presence are looking to expand internationally. The questions they often raise are:

  • What business model should we pursue?
  • How do we forecast in a market that we don’t have an experience of yet?
  • What inventory should we hold and where do we keep it?
  • What should be our market entry strategy?

Unfortunately, the news is awash with examples of where companies having ventured abroad are then forced to close down their international operations at considerable cost and often with considerable loses – Marks & Spencer, Tesco and other big names have all suffered to some degree in the past.

Medium sized retail customers are looking to grow internationally. The obvious route is online and utilizing online media to increase exposure to a brand. Targeting outside of a core market is also worth considering. This obviously poses many challenges, but there are a number of approaches retailers can take and a range of areas to consider.

  • Venturing abroad, traditionally, ranging / location and other decisions are made by “the international” team within the retailer, often making assumptions on local needs – without sometimes fully appreciating some of the local variances. An alternative is to find a local partner, who owns a local brand portfolio and can work with you – it can be mutually very beneficial.

However, finding the right partner can be difficult and often new-comers can find themselves locked into contracts that can be difficult to get out of. Proceed with caution is probably the best advice.

  • Another route, which has a proven track record for many of our customers is – The Franchise Model.

A franchisee operates entirely at their own risk, with their own money. Initial start-up costs are relatively low and are often limited to shop-fit out, branding and feel of the store. The franchisee only buys the products that they are sure they can sell, as there is often no option to return the product. (Note: In many cases, the franchisees are better merchandisers than merchandisers at head office). In addition, the operator chooses the location, manages the store, deals with rent, utilities, local taxes and resourcing. This allows the brand owner to focus on getting the product into the country on time, distribution to the stores and “only” to manage the brand – marketing, PR and store support.

A client recently sought our advice. Initially, wanted to manage and operate their own stores and wanted to roll-out 600 stores within 5 years, hoping to open 2 stores per week for 5 years. This ambitious program would not have been financially viable and the organisation hadn’t sufficient resources and man-power to manage the opening and on-going running of so many stores (they had 40 at the time with the remainder being wholesale).

Using a structured franchise model and roll-out plan, the roll-out of 500 new stores took 5 years. Using our expertise and support, the customer was able to increase production and sourcing capacity to meet the new demand, ensured the right inventory location and development strategy and was able to have the appropriate warehouse locations to reflect the expansion strategy. In turn it allowed a sales and support plan to be effectively implemented for franchisees.

In Summary, successful international expansion can be achieved in many ways and retailers need to review all options available to them, balancing risk, investment, control and capability.