International expansion is complex for both legal and cultural reasons, and franchising is a uniquely strong solution for both. The concept of franchising enables organizations to expand their business through empowering locals in a given area to open a business location representing the parent company's brand, operational strategy, and products.
The Pros and Cons
When considering the current trends in franchising from an international perspective, it's important to understand why organizations do this, why individuals are interested in opening a franchise, and why governments are open to allowing this approach. Let's take a quick look at the benefits of global franchising, and where the potential pitfalls are:
Pros
- For the franchiser (i.e. the parent company), franchising allows rapid expansion with less risk and required capital (as some of this risk is assumed by franchisee, along with funding).
- For the franchiser, success is closely tied to understanding the culture and language of a given area. A franchising model can provide both.
- For the local government, jobs are created and ownership remains local.
- For the franchisee, they are given an opportunity to own a business with an incredible pool of resources, knowledge, and support.
- For the franchisee, much of the initial business plan, sourcing, quality control, marketing, and other core functions are already prepared, tried, and tested.
Cons
- The franchiser is outsourcing some amount of control and returns on investment to the franchisee.
- The franchisee, as a result, is incurring a substantial cost. As of 2010, opening a McDonald's franchise could cost anywhere from around $1 million to around $2 million (USD).
- For local governments, there are a great deal of legislative and contractual considerations when allowing franchising into the economy. Ensuring each party acts legally and ethically requires resources.
While these lists could both be expanded a great deal, this should provide some context for the why behind the high volume of global franchising.
Trends in International Adoptions
The number of global franchises has seen a great deal of expansion in recent years, particularly with emerging economies (such as the BRIC grouping) seeing substantial growth and increased purchasing power. Considering the cultural advantages discussed earlier, franchising has also seen some unique trends in adopting cultural perspectives and adapting product offerings.
A nice example of adopting cultural tastes can be see in the fast food industry. McDonald's, KFC, and a variety of other small food chains have distinctly different menu items depending on where in the world you are when you visit one of these chains. Convenience stores that franchise, such as 7-Eleven, operate quite similarly. Understanding local demand and local availability of certain products changes what the consumer in those areas are offered. These cultural adaptations allow globally expanded companies to compete effectively throughout the world.
KFC World Operations
As of 2014, KFC carried out operations in all of the countries highlighted in green. Localizing, adapting to culture, and expanding their scope to this level of global operating is evidence of just how advantageous franchising can be as an expansionary tool.