Should You Consider an International Franchise?
Jeffery Adler always knew he wanted to take his San Diego company global. He just didn't realize it would happen so soon.
In Southern California, Adler oversees three Dlush Beverage Joints, which serve fruit smoothies and café fare like pearl tea and powdered doughnuts in a setting Adler likens to MTV. Things changed a few years ago, after members of the Alghanim family, wealthy Kuwaitis who own many businesses in the Middle East, paid a visit to his flagship San Diego store while vacationing in the U.S. Later, the family contacted Adler about developing the Dlush concept in Kuwait and other areas in the Persian Gulf.
Adler found the proposal intriguing: It would give Dlush an immediate cash infusion of several hundred thousand dollars, long-term income (Dlush would receive a percentage of the new stores' gross revenue), and an immediate international presence. "There was a lot going for it," says Adler. So he accepted an invitation from the Alghanim family to travel to Kuwait to learn more about the proposition and the potential franchisee, Alghanim Sons Group, a large conglomerate that runs many restaurants and entertainment venues. After eight months of legal wrangling, Adler signed a 20-year agreement that allowed his new partners to develop an unlimited number of Dlush stores throughout six countries in the region.
There are now seven Persian Gulf Dlush stores, and Adler says he is happy with the deal. But it has proved more complex and more time-consuming than he first imagined.
An increasing number of businesses are grappling with the challenges of global expansion these days, as investors from the Middle East, Asia, and South America seek out U.S. brands and retail concepts to develop in their home markets. In a recent survey of franchise businesses by the International Franchise Association, or IFA, more than 75 percent of companies—the majority of them U.S. based—said they were planning to start or accelerate international projects over the next year.
Part of that shift can be explained by basic economic trends, says Scott Lehr, vice president of development for the IFA. As U.S. businesses cope with tight lending markets and a weak economy, many countries—including China, India, Brazil, and the United Arab Emirates—still have strong consumer demand for American products, as well as investors flush with capital. Lehr says other factors have also played a role in facilitating international deals, including Skype and other technologies that have made international communication easier and cheaper, as well as increased travel to the U.S. by foreign visitors.
When a lucrative overseas deal suddenly emerges, it's important that company owners not lose their heads, says William Edwards, CEO of Edwards Global Services, an advisory firm that helps franchise companies develop international expansion strategies. "You have to look at where it makes sense to go, not just where there's a deal," says Edwards. "Think of this as an investment, because you'll be spending resources in terms of time, support, and actual costs."
The first thing any company considering a foreign franchise agreement should do is secure the brand's trademarks, says Edwards. Otherwise, a potential suitor could soon turn into a troublesome copycat. Once an agreement is in place, business owners need to get heavily involved in helping the international franchisee accurately replicate the company's core concept. That includes helping the new franchise set up a supply chain as well as laying out guidelines about product quality, the retail experience, and the prices. "The biggest challenge we see for small franchise businesses is that they can end up losing control of their brand," Edwards says.
In Adler's case, there were a few minor inconsistencies. In an audit of the new locations, he discovered that the Middle East franchises had been using a different espresso blend than had the California stores. Some things were adjusted for cost, says Shady Badawi, director of operations for Dlush's Middle East franchises. But the new blend, from the Italian brand Illy, is popular in the Middle East, says Badawi. "We've just tweaked a few things," he says. Badawi previously ran franchises for larger companies like Pizza Hut, where he says things were more tightly controlled. He views the arrangement with Dlush as more of a collaboration. "It's small," he says, "so that gives us a lot more freedom."
Adler also worries a little that the fresh, youthful vibe he has worked to cultivate at Dlush's Southern California locations can't really be duplicated in the Middle East, where the culture is more conservative. "In Southern California, someone walks into the store, and the guy behind the counter can say, 'Hey, whassup?' " says Adler. "Not there. It really has to stay toned down." Badawi acknowledges some differences but says, "The brand has been well accepted here. It's young—it's fresh and trendy."
But Adler's main concern is that the Middle Eastern stores have taken a lot of his time—and shifted his focus away from building the Dlush brand in his backyard. When Adler meets with potential new investors, he says, they often find Dlush's international venture intriguing, but they ask, "What else could you have been doing in the U.S. with your time and attention?"
Still, Adler can't deny the benefits of the franchise arrangement, especially the solid revenue stream the Middle East stores have provided. Even as U.S. customers cut spending during the recession, the Middle East stores remained profitable. Plus, the Kuwait team developed a smaller kiosk version of the Dlush store that Adler hopes to eventually roll out to U.S. movie theaters, fitness centers, and college campuses. Adler says the experience forced him to think about how to tailor the Dlush concept for areas beyond the West Coast. But for now, he wants to focus on expanding the company in Southern California. "Our message now is to really start paying attention to home base," he says.