ABSTRACT:
There are many modes of international market entrance: exporting, turnkey projects, licensing, franchising, joint ventures with a host country firm, wholly owned subsidiary. Among them, franchising is more and more popularly applied by multinational corporations due to its good points. The research analyzes experience of two typical corporations: McDonald’s and BreadTalk. They have been successful in international market entrance through franchising. Then valuable lessons are withdrawn for Vietnamese enterprises, which requires feasible solutions from both state authorities and enterprises to enhance international market entrance of enterprises.
Keywords: Experience, market entrance, franchising, multinational corporations, Vietnamese enterprises.
1. IntroductionGlobalization and international economic integration, both vertical and horizontal integration, have led to the continuous development of the global economy and brought many great opportunities as well as challenges for Vietnam. Vietnam has to face intense rivalry which is full of strong competitors from foreign countries; therefore, seeking for chances to expand international markets is an important priority for domestic enterprises. In such context, franchising is more proven to be not only a good way of doing business but also an effective mode of entering international markets evidenced by its success in many developed countries. Moreover, the growth rate of franchising activities is estimated to reach 15% to 20% per year, Nowadays, the operation of franchising in international markets has spread from developed economies such as the USA, Canada, Australia… to newly industrialized and developing countries, namely Thailand, the Philippines. Implementing franchising in order to enter a new market is becoming a new trend in business community of these countries including Vietnam.
The research analyzes the current situation and experience of international market entrance through franchising of some multinational corporations, then withdraws lessons for Vietnamese enterprises. Two corporations chosen are McDonalds from the USA and BreadTalk from Singapore. Based on the methodology of dialectic and historical materialism, the author uses a combination of methods of analysis, synthesis, statistics, description and comparison to clarify the study object.
2. Overview of franchising and international market entrance through franchising
2.1. Franchising
According to the International Franchise Association (IFA), franchising is defined as “the agreement between two legally independent parties which gives: (1) a person or group of people (franchisee) the right to market a product or service using the trademark or trade name of another business (franchisor); (2) the franchisee the right to market a product or service using the operating methods of the franchisor; (3) the franchisee the obligation to pay the franchisor fees for these rights; and (4) the franchisor the obligation to provide rights and support to franchisees”. This definition emphasizes the role of franchisee rather than the responsibility of franchisor.
Regarding the Law on Commerce of Vietnam (No.36/2005/QH11), “Commercial franchise means a commercial activity whereby franchisors permit and require franchisees to undertake by themselves to purchase or sell goods or provide services on the following conditions: (1) The purchase or sale of goods or provision of services shall be conducted in accordance with methods of business organization prescribed by franchisors and associated with the franchisors' trademarks, trade names, business knows-how, business slogans, business logos and advertisements; (2) Franchisors shall be entitled to supervise and assist franchisees in conducting their business activities.” This definition describes the rights of both parties to a franchising contract, but still does not highlight their obligations; in contrast, are analyzed in depth by law makers around the world in the above mentioned definitions. Furthermore, franchising fee or “royalty fee” - a very important element - is also not mentioned.
Within the scope and purpose of this research, there are three criteria of a franchise which must be all adhered to for a business to be considered as a franchise: (1) An agreement or a contract between two parties, party A is franchisor and party B is franchisee; (2) Party B is allowed to operate business (sell products or service) and use the trademark, know-how of party A for a period of time and particular space with remarkable assistance and support from party A; and (3) Party B pays fee to party A.
2.2. International market entrance through franchising
International market entrance through franchising is the activity of making franchising in areas beyond national borders with the purpose of entering international markets. This is an effective method of international expansion. It is more and more applied by corporations as a strategy throughout their business activities.
3. Experience of international market entrance through franchising of multinational corporations
3.1. General situation
Table 1 shows that the USA has the highest number of corporations franchising into international markets, followed by France and Australia. Next is other European countries, although the number of international market expanders is not high, it makes up a high proportion in the total statistics.
3.2. Experience of McDonald’s
McDonald’s appeared in the international market for the first time in 1967. It was a direct franchise with a Canadian partner. Since then, the franchise system of McDonald’s has vigorously developed in this market. Nowadays, Canada is still one of the most profitable international markets, until the end of 2016, the number of franchised restaurants in this country was 1,443. After that, McDonald’s started franchising in aneighbour country which was Puerto Rico. After the success in the two neighbouring countries, the corporation continued approaching other potential markets such as England, Japan, Australia and Brazil.
Today, McDonald’s has successfully entered 119 countries with the franchise system of more than 36,000 restaurants bearing its brand. The market of this corporations is divided into three main areas: first, Europe; second, Asia Pacific, Middle East and Africa; third, other markets.
According to Table 2, from 2014 to 2016, the number of McDonald’s restaurants in international markets increased. Except for 2015, in Asia Pacific, Middle East and Africa, the biggest international markets, there was a slight decline to 9,215 stores. The main reason for this is McDonald’s decision to shut down 150 restaurants in China and Japan, in addition to around 200 closed ones in the USA. As a part of their turnaround strategy to boost sagging profits, the corporation had to close stores that showed continuous poor performance, especially in Japan where the company faced some scandals relating to food quality. However, in 2016, this market showed recovery when the number of store opened grew up to 9,375 thanks to the initial success of its turnaround strategy, in which, McDonald’s has been working inenhancing customer experience. Furthermore, the corporation has been pursuingadditional opportunityto keep this growth going including innovation in food items, quality and improvements in the overall restaurant experience. The rise in the quantity of restaurants of this market also proved McDonald’s strong belief in recovering and hope in developing the area, especially Asia Pacific.
Referring to 2016, the largest market was Asia Pacific, Middle East and Africa with 9,375 restaurants, accounting for 27% of McDonalds total stores around the world. Second place was Europe followed by other markets with 8,150 (21%) and 3,775 (10%) restaurants respectively.
Table 3 arranged the 6 biggest international markets of McDonald’s in descending order of number of franchised restaurants. Japan is the biggest one with 3,093 stores followed by China with 2,142 stores. The next place belongs to Canada, Germany, France, United Kingdom. However, the striking feature is the time that McDonald’s entered these markets. The corporation entered most international markets in the 70s, except for Canada, McDonald’s first international market, was entered in 1967 and in 1990 in China. Therefore, the outstanding fact here is the high growth rate of McDonalds in the worlds second largest economy. It was only within 20 years that the number of restaurants establishes in China exceeds that of the 40-year period of system development in other markets (except for Japan).
3.3. Experience of BreadTalk
February 2003 marked the first time BreadTalk has appeared in an international market, which is Indonesia, through franchising. Up to presence, BreadTalk has expanded their chains of bakeries into 12 other countries: China, Indonesia (2003); the Philippines, Malaysia (2004); Thailand, Hong Kong, India (2005); Korea, Oman (2008); Bahrain (2009); Vietnam (2010); Jordan (2011).
Another striking feature about BreadTalk’s international market entrance through franchising is the contract of master franchising can be signed in different scope: national scope in Indonesia, the Philippines or within city scope in China or within a group of countries, especially the location where operation and development of the system faces a lot of difficulties like the Middle East. This flexibility in franchising substantially contributes to the success of BreadTalk.
Furthermore, partner selection process is strict and executed by a council of managers to choose the qualified franchisees capable of meeting the requirements of sustainable development. Normally, the selected franchisees have to undergo a 3 to 6 month training before opening the first store. BreadTalk plays an important role in choosing the location and design of the store. All franchisees are required to purchase ingredients from BreadTalk according to the secret recipes which are strictly controlled by the company. BreadTalk also sends experts to visit the franchised establishments to assure operation is of standard and products quality is maintained. Therefore, the systems operation takes place continuously, ensuring high quality product and synchronism.
Figure 1: BreadTalk franchised stores in foreign countries from 2013 to 2016
(Source: BreadTalks annual reports, collected and organized by author)
Figure 1 shows an upward trend in the number of BreadTalk franchised stores in international markets after 13 years since the kick off in expanding overseas. There were only 7 franchised bakeries in 2003 and the markets were China, Indonesia, the Philippines and Kuwait; however, this number rose dramatically to 23 in 2004 and kept increasing each year. 2011 marked the highest growth rate compared to the previous years with over 100 stores opened. The upturn continued and reached 762 bakeries in 2016. The reason for this rapid growth is BreadTalks strategy to focus on and open more outlets in major market, especially with the entrance into Sri Lanka with the first 3 bakeries. This reflects that the companys overseas business has been progressing very well and tends to continue thriving more vigorously in the future.
With considerable number of franchised stores, BreadTalk chain of bakeries contributed 49.3% to total revenue of the corporation, indicating an increase of 4.7% compared to 2014, with 307.9 million SGD in 2015.
Nowadays, BreadTalk has expanded into 15 countries, but the two most important international markets are China and Indonesia with 426 (approximately 50% of total outlets, contributing over 30% total revenue) and 121 stores (almost equal to the number of outlets in the home country Singapore) respectively. Here, the author will investigate in depth the companys entrance in these two markets.
Entrance in Indonesia
In February 2003, BreadTalk approached Indonesia through the first franchising contract with national scope. The reason to chose Indonesia to be the first international market was that this is the most populous country in Southeast Asia, with diverse demand for a range of products, also a neighbouring country with some advantages in terms of market knowledge, culture and peoples tastes. Moreover, this is not a very large country, most of the population are Muslim and homogeneous in culture, therefore, area division in franchising is not necessary.
The Indonesian franchisee was carefully selected and met all of the companys stringent qualification standards, including a large network and good financial ability. By April 2003, there had been 3 BreadTalk bakeries in the center of Jakarta with so good business outcomes that the company established 6 more outlets in well-placed locations within only a year.
By the end of 2016, there have been over 110 stores which is close to the number of outlets in the home country Singapore, in which three fourths of the total stores are franchises. This figure proved the strong position in the food retail industry of Indonesia.
Entrance in China
BreadTalk first established a subsidiary in China in 2003 before building the distribution system through franchising as a foundation for long term and sustainable development in this market. BreadTalk also considered this as a very important strategic market,therefore, the company has taken quite cautious steps. Due to the fact that the bakery segment accounts for the largest share of the corporations revenue and the cost of inputs is on the rise, especially wheat, entering into China – the worlds largest wheat grower – means accessing to the abundant source of inputs which ensures the stability of materials and operation cost reduction. Additionally, the average growth rate of food service industry of China was 13% in the period between 2003 and 2009 and Chinese consumers spent around 22% of total food expenses on food service. Such figure proved China to be the prospective market for the confident expansion of the company at that time.
BreadTalk has achieved certain success in this market. In China, BreadTalk has spread to 45 cities, indicating an increase of 5 cities compared to 2015. The total number of outlets increased to over 400 in 2016 and most of which are all franchises. To meet the rapid development of BreadTalk’s system, the company decided to associate with a Japanese partner to construct a frozen flour manufacturing factory that supply all the outlets in order to guaranty the homogeneity of the system as well as products quality, reduce the demand for device, equipment and simultaneously improve the productivity of each outlet.
Besides, here, BreadTalk also implemented the delivery service for busy customers wanting to order from home or office depending on the ordered quantity. This plan has greatly created value for customers and raised the prestige for the company as well as the whole system in Mainland China.
4. Lessons for Vietnamese enterprises
4.1. Successfully build the brand and franchise system domestically before franchising overseas
The brand is the most important factor in franchising business system as it is the invaluable property that a company uses to “sell” besides the business secret and products. Furthermore, the brand creates the reputation which not only attracts the customers but also potential interested franchisees. Brand cannot be copied and helps enterprises avoid the risk of business model being copied.
McDonald’s and BreadTalk have spent years on building a brand with international reputation. Such as McDonald’s golden arches with Ronald McDonald clown have become very familiar with customers and made an impression of a chain of modern fast food restaurants offering high quality products and always try to meet the demand. It was the “McDonald’s” brand that guarantees the success in entering any international market.
Therefore, if Vietnamese enterprises hope to replicate their system, the top priority is to continue building the brand. Furthermore, it is important to combine the international as well as the companys standards with national identity.
Before entering any international markets, enterprises should establish a strong system in the home country. Because once the domestic franchise system is really vigorous, enterprises can build a strong enough brand and accumulate the necessary experience which promotes the success in other markets. Every process must be carefully, attentively prepared and achieves resounding success before starting franchising rather than rushing for the trend.
4.2. Thoroughly understand the target market and legal framework
Enterprises must be really knowledgeable about the international market and law of the target market. Before deciding to enter a market outside the territory through franchising, the franchisee must thoroughly understand the law in general and the franchise law in particular in order to prepare the franchise agreement and related matters such as taxes, labor... and avoid being disadvantageous during the franchising period. On the other hand, franchising businesses also need to do market research to determine the needs of consumers as well as differences in culture, religion, habits, tastes to build the appropriate franchising strategy. Despite the fact that in a franchise systems, products and services must be consistent and the business model must be standardized, in some cases, when franchising abroad, the franchisor must allow the franchisee to add or change some products and services or some differences in the business model to meet the specific needs of the locality.
4.3. Carefully find and choose the suitable franchisees
Enterprises need to actively seek for partners and have to select foreign partners carefully. First and foremost, businesses need to advertise their brand and business model through means such as advertising through television, internet, specialty magazines, franchise shows and exhibitions to introduce their own businesses and search for potential partners. After that, the franchisee should select franchisees according to some basic criteria such as financial ability, human resources, experience in the field... To avoid making wrong choices, businesses should require applicants wishing to buy franchise to participate in a real system operating program before deciding whether or not to sell the franchise. Not only does this eliminate unsuitable candidates, but also gives the franchisee a better understanding of the franchisor's business model and make the right decision.
4.4. Focus on brand promotion and protection
Franchising businesses should focus on promoting and protecting the brand. As mentioned earlier, brand is a key factor determining the success of franchising, especially when it comes to overseas markets. In addition to promoting, it is also important to focus on the protection of the brand by registering trademarks and trademarks to ensure the interests of the brand owner and avoid any disputes that may arise in terms of infringement in the future.
4.5. Enhance management and human resources
Businesses need to strengthen management capacity and establish consistent policy in controlling the franchise system. As the system is out of national borders, management is more difficult due to geographical, legal and managerial constraints. For transnational management, businesses need to focus on building consistent control system, forming a team of regular quality control professionals.
Besides management, human resources development and management is especially essential to the success of any franchise which requires the cooperation. McDonald’s and BreadTalk all focus on providing training programs from the most basic knowledge of ingredients, sanitary, serving style... to even advanced knowledge about leadership and forming strategy as the employee moves to higher position. Furthermore, the promotion mechanism of McDonald’s gives an idea of empowering the lower level employees in order to get oneself to higher positions.
4.6. Flexibility in choosing the franchising form
Franchising businesses need to be flexible in choosing the right form of franchise to enter international markets as well as to formulate franchise contracts in a tight way, or even combine many basic franchise methods according to theory to create a the companys own form of franchising. McDonald’s applieddirect-unit franchise contract while applies master franchise contract to some special markets and reputable partners. On the other hand, BreadTalk used master franchising which can be signed in national or within city scope and Aptech adopted both master franchise and joint venture .This helps reduce all risks for the franchisor and also make sure that no expansion opportunity will be missed out.
5. Conclusion
In conclusion, the research focuses on some fundamental issues of franchising and international market entrance through franchising, analyzes the situation of international market entrance through franchising of McDonald’s and BreadTalk, two successful examples. The franchising activities of American and European businesses are the most dynamic; however, Asia is the hot spot where companies are thriving and will be key factors for the development of international franchise in the future. Finally, the author withdraws some valuable lessons for Vietnamese enterprises, which is expected to enhance the international market entrance in the coming time.
REFERENCES:
1. Sherman Andrew J., 1998, Franchising and Licensing, American Management Association, USA, p. 78 - 100.
2. Barbara Beshel, 2010, An introduction to franchising, International Franchise Association Educational Foundation.
3. BreadTalk Group Limited, 2017 - 2004, Annual Report 2016 - 2004.
4. Micheal G Brennan and Phillip F Zeidman, 2016, United States - Getting the Deal Through - Franchise 2011, Getting the Deal Through..
5. Crisil Research, 2010, Independent Equity Research - Aptech.
6. Jim Dao and Tu Ngoc Trinh, 2015, Getting the Deal Through - Franchise, Vietnam Chapter, United States.
7. McDonalds Corporation, 2015, Curriculum Roadmap, McDonalds.
8. McDonalds Corporation, 2011, Financial Information Worklook - Restaurants by country.
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Economy 4th Edition, United States.
THÂM NHẬP THỊ TRƯỜNG QUỐC TẾ BẰNG HÌNH THỨC
NHƯỢNG QUYỀN THƯƠNG MẠI: KINH NGHIỆM CỦA CÁC CÔNG TY
ĐA QUỐC GIA VÀ BÀI HỌC CHO DOANH NGHIỆP VIỆT NAM
TS. NGUYỄN TIẾN HOÀNG
Trưởng Bộ môn Nghiệp vụ, Trường Đại học Ngoại thương - Cơ sở II
TÓM TẮT:
Một doanh nghiệp có nhiều sự lựa chọn để thâm nhập thị trường quốc tế: xuất khẩu, dự án trao tay, chuyển nhượng giấy phép, nhượng quyền thương mại, liên doanh với doanh nghiệp nước sở tại và thành lập doanh nghiệp 100% vốn nước ngoài. Trong đó, hình thức nhượng quyền thương mại trở thành một sự lựa chọn ngày càng phổ biến của các công ty đa quốc gia nhằm thâm nhập thị trường quốc tế. Bài viết này phân tích kinh nghiệm của hai công ty điển hình thành công trong lĩnh vực này là McDonalds và BreadTalk, từ đó rút ra các bài học kinh nghiệm cho doanh nghiệp Việt Nam. Việc vận dụng thành công các bài học này đòi hỏi phải có một hệ thống giải pháp đồng bộ và khả thi từ cả các cơ quan quản lý nhà nước và doanh nghiệp trong nước.
Từ khóa: Kinh nghiệm, thâm nhập thị trường, nhượng quyền thương mại, các công ty đa quốc gia, doanh nghiệp Việt Nam.
Xem tất cả ấn phẩm Các kết quả nghiên cứu khoa học và ứng dụng công nghệ số 08 tháng 07/2017 tại đây
