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North African Franchisees Open For Business

Written by : Hannah Armstrong
2008-08-15
Franchising is transforming the landscape of goods and services distribution in North Africa. Morocco has been profoundly affected by the arrival of foreign franchises since it opened its borders to the industry over ten years ago. Algeria and Tunisia, both working to lower trade barriers and encourage better business practices, are reforming legislation to create favorable conditions for the large-scale entry of foreign franchises. The countries' consensus is that franchising is a proven means for ameliorating commercial practices, importing tested know-how, and stimulating growth of small- and medium-sized businesses.

Algeria

Once wary of the security situation and political instability that marked Algeria in the 1990s, French and some European franchises are looking at the Algerian market with fresh interest in the new millennium. Brands seeking expansion, especially in the clothes, services, agrobusiness and high-volume distribution sectors, want the opportunity to sell to Algeria's 33 million consumers. French companies like Yves Rocher, Jacques Dessange, Celio and Carrefour have recently appeared on the scene.

Franchising made a very late entry into the world of Algerian commerce, with back-to-back international franchising forums taking place in 2006, accompanied by official declarations of the social and economic benefits of allowing the entry of foreign franchises. A representative of the Ministry of Commerce praised “the help of the experience of foreign businesses” in promoting greater professionalism in services and distribution. The state also views franchising as an important vehicle for job-creation and combating informal markets and counterfeiting through improved networks of formal distribution.

But legal barriers continue to impede the progress of franchising here. Algerian law and finance do not currently distinguish between franchising and importing. Franchisers are not allowed to transfer royalties, and banking transactions are not currently regulated. Franchises like the Belgian fast-food chain Quick, and the French automotive services chain Speedy, have reported long delays in receiving promised authorizations to open. The World Bank reports that real growth in total trade of goods and services in Algeria has actually decelerated from 5.1 % in the early 2000s to 0.4% in 2005-6. Last year was even worse, with a -4.2 % negative growth rate. As Algeria prepares for accession to the WTO, the government should push through reforms of existing financial and judiciary conditions that hinder franchise development.

Some Algerians view franchising as an overdue modernization of Algerian commerce, while others fear a neo-colonial French invasion that will hurt local business. Local businesses have expressed concern about competing with giants like Quick or Carrefour. However, they may stand to benefit as the competition improves the quality of products and services throughout the sector. Foreign franchisers transfer their knowledge to franchisee partners and bring the competition for local operators up to international norms and standards. Decisive measures on the part of the government to encourage the development of franchising will rely upon this population's willingness to open up to Western markets.

Morocco's Success Story

While franchising has proven slow to take off in Algeria, the sector is soaring in Morocco. Franchise distribution increased by 20% in the past five years, and the Franchise Guide 2008 reports that there are currently 409 networks of franchise distribution in Morocco, with more than 2000 points of sale. The Guide attributes this success to changing habits of consumption, the progressive transfer of consumption from traditional markets to organized distribution, and the effects of lowered taxes after the passage of various free-trade agreements.

The Moroccan example shows that the entry of international franchising can act as a powerful stimulus for local entrepreneurship. Moroccan franchises currently account for 15% of the country's total number of franchises. “International franchises created a forum [in Morocco],” according to Jallal Bernoussi, Director of Enseignes et Marques, a franchise consulting agency. “This had the impact of competing with traditional commerce. Traditional commerce, in admiration, pushed itself to a higher level. First, there was competition, then emulation, and then innovation. This phenomenon created a market for local franchises.”

The Saham Group, a strong presence in various poles of Moroccan economic activity, including insurance, real estate, technology, and offshoring, handles five franchises, of which three are “made in Morocco”. Abdalah Marrakchi, CEO of the Group's distribution pole, noted that “the rapid and significant development of Morocco, and especially the emergence of a middle class with purchasing power mean that franchise-related consumption should be correlated to these new market trends”. Saham Group plans on expanding its successful Via Seta brand, which specializes in headscarves and neckties, into neighboring markets in North Africa and into Middle Eastern countries.

According to Mr. Bernoussi, franchising requires three criteria in a business environment: locales, such as shopping malls or commercial districts, financing options for franchisees, and legislation. The construction of shopping malls in various regions of Morocco will serve as a strong platform for the sector's continued growth in the coming years. A special law was passed in 1993 to encourage the installation of foreign franchises. The legislation authorizes the Office of Exchange to allow and regulate the transfer of royalties abroad. This move decisively opened the door for franchise investment to flourish in Morocco. The Office of Exchange ensures proportionality between royalties and sales figures, so that franchisees can keep enough of their profits from leaving the country.

Tunisia

In Tunisia, legislation still blocks the transfer of royalties from the franchisee to the master franchiser abroad. Franchises in Tunisia are governed by commercial and contract law; it is theoretically possible to send royalties abroad, but only on a case-by-case basis. Franchising consultants are lobbying for a franchise-friendly law. Some consultants, such as Tareq Yazidi, chief consultant and founder of Tunisie Franchise, have spent the past year working closely with the Ministry of Commerce on a new law to allow Tunisian franchisees to pay royalties to master franchisers abroad. “The text of the new law for franchises will make it easier for them to obtain permission to transfer funds abroad in order to pay royalties,” Mr. Yazidi told EXECUTIVE.

In allowing small and medium sized businesses access to more elaborate networks of distribution, Mr. Yazidi indicated, franchising will improve the efficiency of distribution and the quality of goods and services, benefiting both businesses and consumers. Franchising generates dynamism in commerce, and also involves industries' meeting higher standards for quality and safety, especially of foodstuffs.

Carrefour was the first supermarket to open in Tunisia, in 2001. Other franchises have since trickled in, especially clothes, leather, and shoes brands. The arrival of international brands has already had a positive impact. Carrefour, for instance, stimulated local industry by participating in an effort to export Tunisian products in the international network of its outlets. Promotion of the sector in Tunisia ultimately aims at the emergence of national brands in the domain of distribution. This is an important challenge for the creation of a new entrepreneurial culture.

Mr. Yazidi points out that Tunisia is obliged to unseal its borders to foreign investors and entrepreneurs under the GATT and WTO. Furthermore, he has studied the positive economic and commercial impact of franchising in Morocco, and is pushing for a similar openness in Tunisia. “Franchising enables us to reduce the risks that accompany the entry of foreign investment. The arrival of foreign brands will impose better management on local businesses as well as improving their services. It is certain that the arrival of foreign brands will create tough competition for local commerce and even, in some cases, lead to failure and bankruptcy. But let's not forget that a franchise installed in Tunisia is an independent Tunisian business held by capital that is 100% Tunisian.”

Although there are fewer than twenty franchises in Tunisia at present, the passage of new legislation will open the door to hundreds of foreign brands. The transfer of know-how and technical assistance, in turn, will encourage local businesses to become more competitive. In the meantime, anticipation is building and franchise-consulting agencies are beginning to appear on the scene. Since six out of ten franchise candidates require a loan to enter into a franchising contract, consultants are working with banks to develop special lending options for would-be franchisees. These indicators are signs of encouragement for international franchises interested in expanding in the region.

South African Model

In European and North American countries, home-grown franchises account for, on average, 90 % of the sector, with only 10% percent of franchises based outside the country. In emerging market countries, the inverse is the case, with an average of only 10% of franchises home-grown. These figures, to some extent, validate concerns in Tunisia and Algeria regarding the negative impact of foreign franchise entry, in the form of lost royalties and harm to local business. But these fears are short-sighted compared to the long-term positive impact of franchising on local entrepreneurship, an impact whose success is measurable in Morocco and South Africa. Morocco, thanks to over a decade of franchise expansion, has already surpassed the 10% average for emerging market countries, with 15% of its franchises now Moroccan.

Franchising advocates in Tunisia and Algeria are inspired by the positive impact of franchising in Morocco. Moroccan franchising experts, several steps ahead, have their sights set on the South African example. South Africa has experienced significant social and economic benefits from the growth of franchising within its borders, and the country's own homegrown franchises now account for 80% of franchises present in the country, employing more than 300 000 people. With Moroccan homegrown franchises growing in number and making plans to open branches in other regions, Tunisia and Algeria should make good on their promises of legislation reform and eliminating trade barriers under international agreements.

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