Franchising is a proven route to the successful international expansion of leisure businesses such as fitness studios, golf clubs and tennis schools. In the leisure sector global brands such as Curves International and Gold's Gym have used franchising successfully to grow in both traditional economies and emerging markets.
However, franchising is not the exclusive preserve of US franchise brands. A franchise strategy can also work for companies that have never franchised before. Some hospitality and leisure companies use franchising as an alternative to direct investment when it comes to expansion in the lucrative but high risk emerging markets of South- East Asia, Eastern Europe, the Middle East and Africa.
A healthy way of doing business
Franchising is an established way of expanding a business internationally. Annually it accounts for turnover of USD$300 billion in Europe, USD$850 billion in America and USD$130 billion in Australia. Together with management agreements, it is the preferred form of international expansion for many successful leisure brands. The success of fitness franchising in the USA has demonstrated that international franchising works for the sector. In Germany fitness franchising is the number one growth area for the industry. This is why brands such as Fitness First, Gold's Gym and LA Fitness use franchising as a tool to expand business internationally.
Benefits for Franchisor and Franchisee
Franchising works because it offers real benefits, not only to the brand owner but also to its franchisees. It offers a number of clear advantages to fitness companies looking at global markets. For the franchisor, it removes the need to invest capital and other substantial resources in the venture. It uses the local know how and connections of the franchisee to secure good sites. A franchise strategy will see the local partner make the bulk of the investment whilst benefiting from the knowhow, good name and quality assurance program of the fitness company acting as franchisor. Franchising enables companies to access the required capital and grow the business internationally without significant expenditure or external funding. Franchising also allows companies to attract high quality local investors. These investors are highly sophisticated and have a great incentive to make the project a success in their local market. They also have a strong understanding of the local market. So franchising not only enables you to grow your business internationally by taking advantage of the capital and resources of local investors, but also enables the local investor to have access to the blueprint of a strong proven concept with a known reputation. Few local investors have the resource and time to research their own specialist know how to put together an innovative and successful new fitness concept for the local market that would generate attractive levels of income without the trial and error that goes into building a successful new leisure business.
Preparing to Step up
However, in order to take advantage of the potential that franchising offers, one needs to plan the approach carefully. Successful leisure businesses often receive a multitude of offers from foreign real estate developers interested in taking a franchise for Russia or China or the Middle East. Whilst this may be very flattering, it is important to be discerning as many of these would be franchisees will not have the required operating experience in the sector. A franchise which has been well planned, structured and executed can have a substantial positive impact on a business but one that has been done as a response to an opportunistic approach from a foreign developer can be catastrophic. The reality is that on those relatively rare occasions where international franchises fail, this is usually due to lack of due diligence regarding local partners.
Before Jumping in
Before entering into an arrangement with a local partner the leisure company also needs to ensure that its brand is fully protected by way of trademark registrations in the target market and that any franchise fees or royalties are structured tax efficiently so as to avoid withholding taxes. That requires some expert professional advice before negotiations start. There are countries where the registration of a trademark can take between two and four years. This can result in promising negotiations aborting because the trademark situation is unclear until registration has been achieved. Early planning is therefore key.
The basic structure for international leisure franchises is straightforward. The franchisor grants the local owner the right to operate a gym at a given location for a set number of years. A gym franchise agreement will usually be for between 5 and 10 years. Where the local partner does not have operating expertise, it may want to engage a local management company to operate the property for it. This is often seen for golf or tennis clubs. Which approach is adopted depends very much on the partner and their operating experience. If they already own and operate leisure businesses, they do not need to engage a third party manager. If, however, they are new to the sector, the franchisor should insist that arrangements for quality management are put into place. This can also take the form of appropriate external hires.
In addition to the plain vanilla unit franchise for a single property, more sophisticated structures are also available and should be considered. Whilst exercise studio systems with limited equipment costs are suited to Master Franchising and direct franchising, the investment required for a large leisure club, will exceed the resources of the typical unit franchisee. Instead companies should partner with an established player that has the resource available to it to construct multiple units over an agreed period of time. This is known as area development franchising.
Management Agreements can be another attractive structure where the leisure company is able to make senior management available to run the local licensed operations. Typically, the franchisee/local investor would pay the salaries of such senior managers as well as a success related incentive fee for the management services in addition to the royalty. Incentive fees are a proven method of permitting participation by UK entities in the profit of its foreign partners without the risk and complication that goes with an equity investment.
Practical matters such as importation of the exercise equipment and local health and safety rules impacting weight loss programmes and exercise require a risk analysis for each market. If the importation of exercise machines requires additional expensive testing or certification, a market may not be suitable for franchise. In some countries the owner of a fitness venue needs to hold certain qualifications and this can be an obstacle to a franchise program as the franchisee may not hold the required qualification. Weight loss programmes may have to be supervised by a qualified dietician and this could impact the cost model. The use of electronic personalised calorie counters or training data may be affected by privacy laws. It is therefore vital to undertake market research into the regulatory environment before pushing ahead.
How about joint ventures?
Local partners will often suggest a joint venture. Typically, this involves taking an equity stake in the local business and a profit and loss participation. The obvious attraction would be a profit share. But, these structures are high risk and should only be attempted by experienced global organisations with access to funding and a large budget for legal and consultancy fees. Joint ventures can result in the total loss of the cash invested and significant management time being diverted from the UK operations without any financial reward. Empirically most joint ventures fail and more recently many companies in the global sphere have converted their problem joint ventures to franchise and management type arrangements.