International Risks of Franchising!

Franchising is a developed relationship between two parties. Most people considering “franchising”, look at it from their perspective. However, what about the Franchisor?

Most don’t realize the risk they take with the Franchisee! Especially on the International Market!

For example, in Russia, franchising is having its difficulties, for example, every morning Christopher Wynne, an American living in Moscow for the last 10 years, is off to a battlefield, armed not with an assault rifle but a rolling pin and pizza cutter. Wynne, who is Chief Executive of Papa John's Russia, an International franchisee of the U.S. pizza delivery chain, said his company faces many problems, including bureaucracy and high interest rates which are only a few!.

"Doing business in Russia is somewhere between sport and war every day. You have to face a lot of challenges," he said.

These problems, however, are typical for most franchises operating in Russia and result in some foreign companies giving up franchising in order to run their operations directly.

Foreigners are cautious, to say the least, about the political and economic situation in Russia. The "franchising" model requires stability and predictability of an economy, especially with International circumstances.

One of the best ways for small businesses to grow in the West is with debt. You can get long-term cheap financing for small businesses in Europe or America, but in Russia it's very difficult, however, while Wynne's firm is doing well, with 20 restaurants operating in Moscow and two in Siberia, others continue to struggle, there is a risk to be considered. “To cancel an agreement with a franchisee means the risk of losing everything. No one rejects his partners," Wynne said, adding that it is much easier to work with a local partner, who has market knowledge.
Companies that cancel franchising agreements have to either buy out their stores from a local partner and then deliver on all the obligations with shopping centers, or close them, he said. The "unpredictability of the market" and the "International climate" need to be considered when making operational decisions.

Without having the opportunity to rely on a local partner with market knowledge involves certain risks. Although launching a franchising program is more convenient because a franchisee bears the major expenses, directly managing stores ensures that advertising budgets are spent properly and foreign firms' corporate standards met.

When local franchisees fail to meet corporate standards, the results can be that these franchise companies can cancel their franchising agreements. These firms are used to working in line with high standards, while a store in some regional town doesn't always meet these standards due to the poor infrastructure and low cultural level, the value of a local partner can be a strategic advantage.

Alas, the risk of International Deployment by a Franchisor is revealed!