'Cut-throat' U.S. market often underestimated, experts say

Fierce competition in the United States has Canadian businesses looking for franchising opportunities outside North America.

"The U.S. is an extremely competitive, cut-throat market in some areas," says Bernie Wolf, director of the international MBA program at the Schulich School of Business at York University.

Aaron Serruya, president and founder of Mississauga, Ont.-based Yogen Fruz Canada, which operates in almost 80 countries worldwide, says: "Everybody makes the same mistake. They (Canadian franchisors) go into the U.S., thinking that they're so close, they speak the same language ... but the American market is the most competitive market out there."

Given this level of competition, expansion into markets outside North America is enticing. In some foreign markets, there may be no other real competitor, says Blair Rebane, national leader of the franchise and distribution law practice group at Borden Ladner Gervais LLC in Vancouver.

Bernie Wolf

Rebane has a client in the juice and frozen smoothie business in India. "No one else is in that market. A cold drink in a warm climate offers a natural attraction to a growing middle class in India," he says. "You don't go to India and say: 'We're a steakhouse.' " Serruya stresses the benefits of global franchising. After all, there's a limit to how much a business can grow once it has saturated the domestic market.

"The great thing is that you get brand exposure around the world," he says. "You start getting income in an area where you never thought possible. Internationally, there are never-ending opportunities."

Richard Cunningham, CEO of the Mississauga-based Canadian Franchise Association (CFA), agrees. "A number of Canadian systems have reached a maturity level that requires expansion, because they're built-out here. Some have done better internationally. Frozen yogurt and ice-cream products ... have a shorter, seasonal selling period here. Sweet products are very popular in many countries that are less health conscious than we are."

Another factor, according to Rebane, is the developing markets in places including India, some Middle Eastern countries and most of Asia. "These are places that 10 years ago, people would say there isn't enough money or enough of an economy for me to go to."

Schulich's Wolf, who is also a professor of economics and international business, agrees. "If you can get over the psychological distance, the 'bricks' - Brazil, Russia, India and China - are set for astonishing growth."

Statistics are impossible to come by about how many Canadian companies have made the move to expand their franchise efforts abroad or are considering doing so.

But among those that have already made the move are Esquires Coffee Houses in White Rock, B.C., which has operations in Ireland, England and Scotland, and is planning to expand to Europe. Calgary-based CinnZeo Bakery & Cinnamon Treasures has outlets in Chile, the Middle East and Indonesia and is looking to expand elsewhere.

Juice Zone Canada, which is based in Burnaby, B.C., recently signed a master franchise agreement with a company in India and has partners in Europe and Asia. Island Ink-Jet Systems of Courtney, B.C., has franchise outlets in Mexico and Puerto Rico and is interested in expanding to South America, Asia and South Asia.

Andre Lemay, a spokesman for International Trade Canada (ITC), says several emerging markets have been identified. "Brazil, China and India are on the verge of really expanding. Brazil is getting richer by the day, so there are more potential customers for Canadian businesses."

ITC, which is a division of Export Development Canada, assists Canadian businesses looking to expand internationally through various efforts, including its Canadian trade commissioner services.

"China and India are still considered developing countries and they want to shed that image," Lemay says.

A taste for the West is also driving the search for international franchising opportunities.

"India and China have a very large population with a growing middle class that wants things from the West," Wolf says. "If you don't give it to them, someone else will."

It's a desire that also is influenced by political considerations. "In the last few years, some countries have been having problems with U.S. international policies," the CFA's Cunningham says. "The interest in American companies has declined, but they still want Western tastes and culture. So, they're looking at Canada."

Rebane expresses the same sentiment. "The world really wants to do business with Canada," he says. "There are three or four businesses actively involved in the Middle East, which has a love/hate relationship with the West.

"The Canadian (as opposed to the American) brand is seen as carrying less of the negative."

Wolf attributes some international franchising of Canadian businesses to "an immigrant from a particular area going back to his origins, so to speak, investing in his or her native land, using whatever seems to be the appropriate entry vehicle."

Such repatriation is familiar to Javad Heydary, a lawyer with Toronto-based Heydary Garfin Hamilton LLP, who specializes in franchising and technology.

"I am involved with a number of people who are first- or second-generations wanting to maintain ties with their home country," he says. "They are familiar with the market, they know the language, know the background."

Not every entrepreneur is suited to the challenges of global expansion, however.

"If you don't like people and change, stay away from international franchising," Heydary says. "It's best suited to those who are adventurous. There are market and cultural risks. A lot of developing countries have an unstable regulatory environment. Even laws in place right now could change overnight."

Wolf says people also need to be globally oriented and have some sense of cultural differences. "In Asia, people don't like to say no. So, if they don't say no, don't interpret that as a yes. If you want to entice potential franchisees you must be a good salesperson. Why should someone invest their time, money, etc. into my product? You have to be able to tell a good story."

Rebane says potential global franchisors "need to be analytical enough to determine how and why their business works in Canada. They must be energetic, tolerant and flexible."

Brenda Williams, vice-president of marketing and brand management at Island Ink-Jet, says franchisors considering foreign markets must "understand how culturally different the finances and economies of different countries are."

As an example, she points to buying habits in India where consumers only buy "enough to get them through to the next paycheque. They would never buy in bulk, as we do here," she says.

For her company, which is in the ink-jet refill and ink-jet cartridge supply business, this suggests "producing smaller, cheaper quantities of our ink, only lasting a short time."

One of the key considerations for potential global franchisors, the ITC's Lemay says, is product adaptability and marketability. "Is your product in demand? You can't sell Canadian avocados in Mexico (one of the largest producers in the world.)" Rebane says: "If it's a product-based franchise system, can you get the product there? Is the cost to ship it prohibitive? What are the tax considerations? If it's food-based, will you bring tacos to Thailand?" Kevin Pietsch, national sales manager for Minneapolis-based Franchise Times magazine, advises potential global franchisors to work with local governments, bring the community onboard, figure out lending sources and the local language, and provide meaningful support to franchisees.

Chad Parker, CEO of Juice Zone Canada, says: "Take the time to source a compatible partner in each market. Don't try to do it on your own."

Serruya of Yogen Fruz agrees. "We don't need to go in and try and understand Thailand, for example. We find someone who has the pulse of the Thai market, someone who understands the food business and the franchise model."

(Anastasia MacLean can be reached at maclean@businessedge.ca)