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Franchising in the world

Written by : Michel Gagnon
2008-02-15
During the course of a Study on Franchising, on behalf of the African Development Bank, in which I was fortunate to participate, our group had to research the status of franchising in the context of the entire World.

As some of the readers may already know, Business Format Franchising started in the 1950’s with Ray Kroc and McDonalds. Trade Name Franchising started even earlier with Singer Sewing Machine back in the 1850’s.

There are reportedly over 17,500 Franchise Systems around the World; supporting over 1.2million franchisees and 12.5million employees; collectively generating estimated retail sales in excess of $1.4Trillion US dollars annually!

Using the World Bank’s classification of countries, there are basically 3 groups:
High- Income economies
Middle-Income economies
Low-Income economies

Compiling this information was difficult as this no single area to collect this data and many countries do not keep records on franchise activities. Consequently, what will follow are extracts of sample countries for each of these classifications.

High-Income economies typically possess mature, efficient legal and judiciary systems and capital markets. Currencies are usually stable with little if any restraint of foreign exchange transactions.

These countries include the USA, Canada, most of Western Europe, Japan and Singapore. Our sample included 19 such countries which represented 36% of all economies classified as such by the World Bank. These sample countries also represent 13% of the world population but 61% of all Franchise Systems and 76% of all Franchisees.

Of course, Franchising has developed to the greatest extent in North America, with the US and Canada, the first and second largest number of Franchise Systems respectively in the World. It is worth mentionning that Canada, in relation to its size, is the most Franchised Country in the World. There are over 1,300 Systems operating 76,000 franchises, employing some 1,200,000 employees in Canada.

The last two decades have seen an increasing number of primarily US-based Franchise Systems expanding internationnally. According to some, this increasingly global perspective is motivated by the need for sales growth while combating the pressures of market saturation in its domestic market. European-based Franchise Systems do not appear to have reached the same level of market saturation and therefore have experienced proportionally little international expansion.

An example of this is the international expansion of McDonalds.According to its 1998 annual report, McDonalds achieved a 2% growth rate in sales domestically versus a range of 23% to 63% in overseas markets.

In our sample of 12 Middle-Income economies which included South-Africa, Brazil, Phillipines, Mexico and Malaysia, to name the larger ones, these nations represented 12% of the world population, 18% of the Franchise Systems and 8% of all Franchisees. Therefore in most of these countries, Franchising is becoming established as a method of doing business but is still in its development stage.

Finally, we captured 13 other countries which are described as Low-Income economies. These include China, India, South Korea and other nations in Eastern Europe, South America and Africa. These nations represent 46% of the World population, but 21% of all Franchise Systems and 15% of all Franchisees. These figures must be considered heavely weighted by the strong presence of franchising in China and South Korea.

Several issues affect the growth of franchising in emerging countries. First franchising is relatively unfamiliar not only to entrpreneurs, but also to governments and the courts. International franchisors are reluctant to enter into emerging countries, due to the lack of trust in the ability of potential indigenous franchisees and a lack of faith in these countries legal systems.

As a conclusion, Franchising as a way of doing business is quite important around the globe and there is still quite a lot of areas to expand for those who understand this Business Format.

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