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How to grow globally

When Giorgio Kolaj came to the United States from Italy in 1970 with dreams of opening a pizza shop, he never imagined he'd one day fly to Hong Kong to open franchises. But last year, after he and three brothers grew Famous Famiglia to 60 stores, that's what he did. They've now got agreements for 36 units in 11 countries. A search firm told Kolaj that Hong Kong's airport wanted a pizza concession. Investor groups in Mexico and the Balkans approached him directly.

When Giorgio Kolaj came to the United States from Italy in 1970 with dreams of opening a pizza shop, he never imagined he'd one day fly to Hong Kong to open franchises. But last year, after he and three brothers grew Famous Famiglia to 60 stores, that's what he did. They've now got agreements for 36 units in 11 countries. A search firm told Kolaj that Hong Kong's airport wanted a pizza concession. Investor groups in Mexico and the Balkans approached him directly. He's talking with groups in Japan and Mainland China.

"Some markets provide larger opportunities than the U.S.," Kolaj says. "While you have a window of opportunity, and you're prepared, you take a swing at it."

Small chains are dipping into the wave of globalization. The International Franchise Association estimates that 200 U.S. restaurants have 30,000 units overseas. That's a lot, but with 400,000 franchised restaurants outside the United States, there's plenty more opportunity.

And U.S. restaurants remain popular around the world, says Robert Shaw, managing director of Edwards Global Services in Irvine, California. "In Latin America, Asia and the Middle East, they look up to American brands and business systems as among the best in the world."

That's not to say moving into Dubai is simple. "It's the easiest thing in the world to make a sale," says Robert Kushell, a franchise advisor in Pittsboro, North Carolina. "The hardest thing is to make it work. The first couple of international sales you make have got to be a home run. If not, you will be sapped of so much energy and resources that you'll kick yourself for doing this."

The key to success, consultants say, is in choosing the right place to do business. But where do you start? The U.S. State Department recognizes 193 countries, and the Department of Commerce has trade offices in 145.

Often, a country will select itself, when a prospect contacts you from your Website. Before you jump at the chance to collect an upfront fee of $200,000 to $1 million, advisors warn, research the market. How many units can the country support? Is there a growing middle class?

"Where there's a middle class, especially an emerging one, going and eating at a franchise is as much of a status thing as it is a taste thing," says Michel Gagnon, president of Davier Consultants in Montreal.

Even in a low-income country, there may be wealth in big cities—China's urban incomes average 300 percent higher than rural ones. "There might be 10 to 20 percent who have money; the others don't," says Martin Palacios, president of Zero's Subs, of Virginia Beach, Virginia. He has two units in Xian, a metro area of 6 million people.

Local tastes and taboos will rule out many countries. Ruth's Chris isn't going to India, for instance. The cost of real estate may put nations like France and Germany out of a small chain's reach, says Mark Siebert, CEO of The IFranchise Group in Homewood, Illinois. "In western Europe, costs are high, the markets are very competitive, and there's not as much support for U.S. brands."

A final set of questions is legal. If you need to terminate a franchisee, it might take a long time in developing countries like Brazil. "If you have legal issues with a licensee, you could be waiting five years before the decision is made in court," says consultant Ed Teixeira, president of FranchiseKnowHow in Stony Brook, New York.

Following are six of the hottest global markets. We chose them either for their ease of operating new businesses, financial potential—or both.

6.9% GDP growth (2005)
$20,004 per capitaincome
Key cities: 
Dubai (pop. 860,000), 
Abu Dhabi (1 million)

Why you'd go: Wonder where the money goes when you fill your gas tank? You'll find a lot of it here, by the Persian Gulf. Like Las Vegas 50 years ago, a vast playground is rising from the desert. It will include 272 hotels with 30,000 rooms and three artificial islands, shaped like palm trees, where Americans from Tiger Woods to Bill Clinton have bought condos.

These celebs, along with 6.2 million tourists a year, dine in the 30 malls going up. The world's largest, the Mall of Arabia, is projected to add 1,000 retail spaces in 2008. All in all, foodservice spending is $4.4 billion and growing 11 percent a year, estimates Australian market research firm BIS Shrapnel.

The seven city-states which comprise the United Arab Emirates host 2,600 firms in tax-free zones, including more than 500 U.S. companies. Because the emirates were U.K. protectorates until 1971, English is the language of business.

Besides its own $102 billion economy, the U.A.E. offers access to the 37 million people in the Gulf Cooperation Council, whose six member nations include Saudi Arabia and Kuwait. While war rages nearby, these countries are stabilized by oil wealth and U.S. military bases. Contrary to Arab stereotypes, their young populations like U.S. brands.

But not all brands keep their U.S. formats. In Dubai, alcohol can only be served in hotels and to non-Muslims. New York, NY Fresh Deli of Mesa, Arizona, had to replace all salad dressings which contained vinegar, also considered a spirit.

"Dubai is very westernized, but it's still a Muslim country," says executive franchising vice president Robert Palmer. "You have to adhere to the rules. Ham is a no-no. So are any pork products. We pared back the menu a bit, substituting turkey or beef."

2.9% GDP growth (2005)
$30,437 per capitaincome
Key cities:
 Toronto (pop. 4.7 million), 
Vancouver (2 million)

Why you'd go: For many U.S. chains, this is the first step toward international growth; most of Canada's major cities are within 100 miles of the border. More important, the cultures are so much alike. "Canada has many similar products and consumers to the U.S.," says Richard Weil, president of Nick-N-Willy's Franchise Company in Lonetree, Colorado, with 65 units in the United States and six in Canada. "Opportunities in Canada are similar to opportunities in the U.S."

And franchising is huge here: 850,000 franchised units generate 12 percent of total economic output. "It's the most franchised country in the world, in terms of the impact of franchising on gross national product," says Gagnon of Davier Consultants.

Franchise disclosure laws are similar to U.S. law; many chains simply add a few pages to their offering circulars when doing business here.

The big difference is taxes, says James Schmidt, who has 26 Taco del Mars in Canada. "Fifty percent of your profit goes to taxes. Here in the U.S., it's 33 percent. What's a 12 to 15 percent profit in the U.S. would be 8 to 11 percent in Canada."

Geography determines where to open your first restaurants. Firms in the West usually start in British Columbia, while Midwest or East Coast chains may start in Ontario. Most chains skip over Quebec. It hosts a quarter of the population, but is like another (French-speaking) country.

"Often, Canadian-based franchisors go to the U.S. before they go to Quebec," says Jeff Hanlan of the Canadian Franchise Association. "A lot of Quebec-based franchisors will go to France before they go to other parts of Canada."

9.9% GDP growth (2005)
$1,276 per capitaincome
Key cities:
 Beijing (pop. 14.9 million)
, Shanghai (17.8 million), 
Guangzhou (9.9 million)

Why you'd go: With 11 cities over 2 million in population, the world's fastest-growing economy is a high-rise elevator, and every restaurant chain wants to get in on the ground floor.

"It's like the U.S. in the '50s and '60s, when there were not a lot of chains," says Martin Palacios, president of Zero's Subs of Virginia Beach, Virginia, which has two units in Xian. "Once you break the barrier with Chinese people, to accept Americanized food, you don't have much competition. So there's a much greater opportunity if you're successful in opening up a business."

In 2005, according to its National Bureau of Statistics, Chinese diners spent $110 billion on foodservice, up a dizzying 17.7 percent in just one year. That number should explode by 2025, when McKinsey & Co. projects the urban upper middle class will total 520 million people. Urban purchasing power will total $2.5 trillion. If the big cities were a separate nation, its economy would be the size of Japan's.

Although locations are costly in Shanghai, Beijing and Hong Kong, 14 other cities report foodservice sales over $1 billion. Urban areas like Guangzhou and Shenzhen combine affordability with growth potential.

But China offers unique challenges, especially for small chains with limited resources. Before a company can sell franchises, it's required to operate two pilot stores for at least a year—on its own dime. KFC, the largest U.S. brand here with 1,700 stores, ran nothing but company-owned stores for 14 years before it started franchising.

With a haphazard legal system, trademarks and copyrights can be hard to protect. Just as Chinese manufacturers have knocked off everything from drugs to software, franchisees have been known to copy restaurant concepts and open competing stores under different names.

Get experience in other countries before entering China, recommends Charles Weeks, senior director of Edwards Global in Boca Raton, Florida. "China looks like a money-making opportunity, but big guys have lost tons of money going into China. China is not a beginner's market."

3% GDP growth (2005)
$6,273 per capitaincome
Key cities: 
Mexico City (pop. 19.2 million), 
Guadalajara (4.1 million)

Why you'd go: Since the North American Free Trade Agreement boosted our southern neighbor into our second-largest trading partner, Mexico and the United States look more alike. While Americans groove to Ricky Martin and Jennifer Lopez, Mexicans are shopping at Wal-Mart and Home Depot. While gringos chow down on tacos and salsa, Mexicans are flocking to Subway, TGI Friday's and Ruth's Chris.

"Mexico is a great country for U.S. brands," says Patrick Callaway, president of Francorp Inc., in Olympia Fields, Illinois. "It's very close geographically, and it's very inexpensive for us to do business there."

Franchising is hot as haba- neros. The U.S. Commercial Service ranks Mexico 8th in the world for franchise development, and the Mexican Franchising Association reports 29 percent of franchises are U.S.-based. The government has allied with the Overseas Private Investment Corporation to make loans to American small businesses that want to invest in Mexico.

In 2005, restaurants did $15 billion in sales. That's not a big enchilada, but the largest Spanish-speaking country in the world is a jumping-off point to 457 million other consumers in Latin America, thanks to 11 other trade agreements that standardize business laws and tariffs between countries.

As trade barriers have fallen, so have language barriers, as more and more U.S. chains do ads in Spanish. Says Weeks of Edwards Global, "If you're working Hispanic markets in the U.S., it's much easier to go to Mexico."

The trick is to find the right business partner. Unlike the United States, where middle-class workers can borrow to buy a franchise, most Mexican franchisees are wealthy families called "grupos." You meet them through referrals rather than through ads.

"Our first few meetings together, I went down to meet the family, the patriarch," recalls Kolaj of Famous Famiglia. "The first several meetings we didn't discuss business. We were more interested in learning about one another's families and organizations."

6.4% GDP growth (2005)
$24,375 per capitaincome
Key cities: 
Singapore (the country is a city-state) (pop. 4.5 million)

Why you'd go: The crossroads of Southeast Asia gives access to 485 million people in Indonesia, Malaysia, Thailand, the Philippines and Vietnam, whose economies are all growing at more than 5 percent a year.

Singapore is everything China and India are not: compact, affluent, business-friendly and westernized. The World Bank ranks it the easiest country to do business, thanks to low taxes, few trade barriers and world-class infrastructure. Fifteen hundred U.S. companies have offices there, and many are headquarters for the whole Asia/Pacific region.

"It's small but very pro-franchising," says consultant Teixeira of Franchise-KnowHow. "There's a tremendous effort to invite foreign companies."

Singaporeans are also crazy for prepared foods, partly because in many families, both spouses work. In 2001, they spent an average $1,060 on foodservice, the fifth-highest consumption in the world, according to BIS Shrapnel. An earlier survey found 55 percent of local's food spending was on eating out. If that's not enough, the government is investing another $60 million to develop the food and beverage industry.

Expect to spend a little extra on your facilities, says Shaw of Edwards Global. Sometimes called the cleanest country in the world, locals expect a more upscale environment than elsewhere in Asia.

8.4% GDP growth (2005)
$621 per capitaincome
Key cities:
 NewDelhi (pop. 12.8 million), 
Mumbai (16.4 million), 
Bangalore (5.7 million)

Why you'd go: If you've called about a computer problem in the past few years, you've already done business with India. Thanks in part to outsourcing by U.S. firms, a well-educated and well-paid yuppie class is emerging in fields like high-tech and business services.

"India is going through a huge boom time," says Francorp's Callaway. "They have this great machine being driven by our own country."

By 2007, projects DSP Merrill Lynch, 44 million households will have incomes over $3,150, equivalent to $17,300 by U.S. standards. Their ranks have tripled since 1995. The largest clusters are in Delhi and Mumbai, but catching up are Bangalore, Chennai, Hyderabad and Pune.

Their dining habits are still catching up to their incomes, reports the Federation of Hotel & Restaurant Associations of India. Right now, only 2.4 percent of total food spending goes to hotels and restaurants, totaling $8 billion a year. But that should jump, predicts Merrill Lynch, as urban consumption grows 20 percent a year.

Culturally, the country is hospitable to U.S. firms, says Portmann of the Inter- national Franchise Association. "It's an English-speaking nation with a lot of education. There's not the cultural shock or the language issues of China."

But American eateries face other challenges. One is to "Indianize" their menus. Hindus won't eat beef, so chains serve chicken burgers and veggie burgers like the vada pav, a potato-based patty. Some chains have separate production lines for vegetarian and non-vegetarian dishes.

Another challenge can be getting your money out of the country, so be careful. Government approval is needed to pay a foreign franchisor lump sums of over $2 million or royalties of more than 5 percent of sales. "You can negotiate and find out two to five years later that the contract you wrote is not going to be enforceable," warns Seid's Kay Ainsley.

Take 4 Global Steps

  1. Fine-tune your system. Build at least 50 to 150 U.S. units before going elsewhere. "The extent you have the infrastructure in place to provide support overseas is the extent to which you are already servicing franchises in markets outside your home market," says Mark Siebert of IFranchise. "If all you have are five franchisees within an hour's drive, you haven't really demonstrated that."
  2. Register your trademarks. Under the Madrid Protocol, a U.S. registration protects a trademark in 77 other countries. Warns Marcel Portmann of the International Franchise Association, "If you go to a trade show, and you're not a registered brand, someone might look at your trademark, and they might register your trademark and keep it hostage till you buy it from them."
  3. Match concept with country. "If I run an ice cream shop, maybe I'm going to attack the warm-weather clients first," says Michael Beam of hospitality consultant HVS International. "If you're a hot-dog company, you're probably not going to make the Middle East your first route of advance." Uncle Sam can help you find the right match. Register with the U.S. Commercial Service at www.buyusa.gov, and you can get detailed market reports on most countries. Commercial Service officers at any of 145 U.S. embassies can introduce you to potential investors and suppliers. You can meet other prospective franchisees at trade shows.
  4. Find the right partner. Most restaurateurs sell the rights for an entire country or region to one company. The ideal area developer has already grown out a larger chain, says Kay Ainsley, managing director of franchise consultants of Michael H. Seid & Associates. "If they've got a track record and an infrastructure built, chances are they know how to do training, understand marketing and have an idea how different flavor profiles need to be tweaked for the local market."

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