Mon, Feb 16, 2004 page12

• Small franchise businesses eye non-US market

  TECHNOLOGY A HELP The Internet, satellite conferencing, low-cost training videos and a surge in international franchise shows are helping fuel the move overseas

  • NY TIMES NEWS SERVICE
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  Cynthia McKay was in business for more than a decade before her food basket company received a dreaded Better Business Bureau complaint last year. She assigned the blame, in part, to her sometimes overzealous plan to go global.

  Le Gourmet Gift Basket Inc, which has 510 franchises, including 25 outside the US, expanded into Hong Kong in 2002. The initial experience was no picnic for McKay, the chief executive.

  Last year, a customer ordered a basket to be sent to an American who had been transferred to China. So, McKay had her Hong Kong franchise make up a basket and send it to the homesick expatriate -- but she underestimated the cultural divide. The client had ordered an American-themed basket but the basket delivered contained pickled octopus and rice cakes instead of smoked salmon and potato chips.

  "The client came back to me, threatened a lawsuit and went to the Better Business Bureau," said McKay, whose company is based in Castle Rock, Colorado.

  "Even though my contract with the franchisee says they are responsible for their own behavior, good will was involved," she said.

  McKay mailed another basket overnight at a cost of US$160 and sent a letter of apology to the customer. The complaint, the company's only one so far, was subsequently resolved.

  For all the cultural misunderstandings and challenges ranging from currency fluctuations to language barriers that she has encountered since expanding abroad, McKay says she has no regrets.

  After moving first into New Zealand in 1999 and then into Australia, Canada and Hong Kong, her company is projecting US$90,000 in international revenue this year. Her company has its sights on South Africa, the Philippines, Thailand and eventually Saudi Arabia, as well as Europe.

  Big players like McDonald's and Dunkin' Donuts have long seen the world as a business opportunity, but an increasing number of smaller franchise companies are sharing this vision. Last year, 56 percent of franchise operators were in markets outside the US, up from 46 percent in 2000, according to a survey of its 810 members by the International Franchise Association.

  "Much of that growth is attributed to the small and mid-sized firms," said Marcel Portman, the group's vice president for global development.

  Experts say the main factors driving the trend are the Internet, the improved technology that allows a company to do satellite conferencing and produce low-cost training videos for foreign franchisees, a saturated domestic franchise market, growing international acceptance of franchising and a surge in international franchise shows.

  Smaller franchise companies should tread warily, however. Portman recites a catalog of pitfalls involving cultural hurdles, economic uncertainty (including the core question of whether local consumers will pay for the product), foreign-exchange instability, the difficulty of checking the financial backgrounds of potential franchisees and obstacles to securing intellectual property rights in countries with weak trademark laws.

  "Or maybe someone already trademarked your name or concept and is waiting for you to come down and pay for it," he said. "This is known as trademark piracy."

  But large or small, American companies can find it tough to sell their franchise concepts abroad, especially in countries where English is not spoken and in those with unfamiliar laws and customs. In such places, recruiting competent local franchisees is crucial.

  Gary Salomon, chief executive of Fastsigns International Inc, a company based in Carrollton, Texas, that makes signs and graphics for businesses, says he made the mistake more than once of expanding abroad without sending in an advance team to investigate conditions.

  In Colombia, for example, the company "had problems with security, political stability and a moti-vated working class that was reasonably well educated."

  The company left Colombia in 1996. And while he has remained in other Latin American countries, both Mexico and Argentina have been plagued by currency devaluations and economic turmoil, he said. And Brazil, though it has a large middle class and a strong work ethic, is saddled with "tremendous inflationary problems and currency stability issues," he said.

  Even Europe can throw a curve-ball at entrepreneurs in the US. Initially, Fastsigns had difficulty with some British franchisees who balked at making aggressive sales pitches, Salomon said.

  But the company sent an operations team and continues to hold training sessions in Britain to make sure the local owners stay on track.

  Fastsigns has 65 international franchises and aims to have 120 within three years, with most of the growth coming in Britain, Australia and Canada.

  For all the perils of venturing into unknown territory, there can be pleasant surprises. When Partyland Inc, went into Saudi Arabia in 1998, the company worried that consumers in that conservative Islamic society would not be receptive to its Barbie-themed party goods, said Kevin Pike, the company's assistant vice president franchise services.

  But the Barbie products sold well, as did whoopee cushions. Balloons are a staple; a Saudi prince recently ordered 4,000 of them at a Partyland store for his daughter's birthday.

  The company, with 350 units in 20 countries, has two stores in Saudi Arabia and two in Kuwait.
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