Expanding internationally with franchising: through direct franchising, master franchise or area development
Part 2 of the series on expanding internationally with franchising.
For part 1, see: Expanding internationally with franchising, internationalisation models: Uppsala model or Born Global.
More and more franchise formulas are considering taking their concept across the border. And with good reason. Around 17 million people live in the Netherlands, while globally there are roughly 7.5 billion. In short, the potential for a business that can successfully cross the border is enormous. In addition, Dutch consumers are critical, and the Dutch market is relatively advanced in areas such as e-commerce and digital adoption. This means many Dutch concepts are well positioned in the international competitive field. Even so, expanding internationally is often a challenge. Hence this second part on international expansion through franchising.
Direct franchising, master franchise and area developers
Direct franchising
Direct franchising offers the shortest lines of communication, but for that reason it is not necessarily the simplest form of international franchising in the long run. With direct franchising you enter into an agreement directly with a franchisee abroad, just as you would with franchisees in the Netherlands.
Advantage
The main advantage is that relatively few changes are usually needed to existing documents such as the manual and the contract. Most of the work lies in translating these materials in a legally sound way.
Disadvantages
The disadvantage is that working with franchisees across the border is often difficult. Not only is the physical distance often considerable, you also encounter language and cultural barriers. Cultural barriers in particular are often underestimated. The way business is done changes the moment you cross the border, and even in a neighbouring country such as Belgium there are significant differences.
The physical distance also makes it harder to find good franchisees. It is more difficult to hold in-depth, serious conversations when you are not based in the country itself.
In addition, there can be legal challenges. When expanding to another country, it is possible to declare Dutch law applicable, but this rarely inspires trust in a potential partner. There are also various examples, for instance in Belgium, where a local court in another country sets aside such a clause and declares itself competent. At that point you may find yourself in Belgium having to explain to a judge why you have not complied with Belgian franchise legislation, even though you may have assumed it did not apply to you.
Master franchise
Another form of international franchising is master franchising. A master franchisee is often required to launch a pilot of their own in the country concerned. Experience abroad shows whether the concept needs to be adapted to the new environment. There is, after all, no guarantee that a concept will be as successful in the Netherlands as it will be in, for example, Germany. Master franchisees are authorised to enter into agreements with franchisees and also take over various management and franchise coaching tasks. If desired, you can agree with a master franchisor that they take on additional responsibilities, for example in the area of logistics.
Advantage
A master franchisee is, in effect, an additional management layer between the franchisor and the eventual (sub-)franchisee who operates the formula. The advantage is that you bring local knowledge on board, without having to invest in extensive market research or opening a local office as the franchisor.
Disadvantage
The downside of the master franchise structure is that a fee split has to be agreed with the master franchisee. Where in direct franchising you collect the full franchise fee yourself, in this structure both the work and the fees are shared with the master franchisee.
Area developer
The last common structure is that of the area developer. The area developer, like the master franchisee, has the right to operate their own outlets in a clearly defined territory. There is one fundamental difference: the area developer recruits franchisees directly for the franchisor and provides services on the franchisor’s behalf to those franchisees. No contract is signed between the franchisee and the area developer.
Advantage of area developers
In large countries an area developer can be a major advantage, because territories are allocated. This reduces risk and increases internal competition. An area developer operates their own outlets, building their own expertise.
Disadvantage of the area developer structure
The disadvantage of the area developer structure is that they are often harder to find. Not only does an area developer need the qualities and capabilities required for the role, they also need the (investment) capacity to set up several outlets themselves.
The best structure
Which structure works best depends very much on the formula. Unfortunately there is no one-size-fits-all solution. If only a few international outlets are envisaged with limited ambition to grow further, direct franchising may be suitable. It can also fit when ambition and willingness to invest are particularly high. Master franchising and area developers, however, can make it possible to grow faster without the parent organisation having to grow at the same pace, and without the complexity becoming unmanageable.