Franchise Update Magazine Issue I, 2017 - Page 64



Predictable Unpredictability Global franchise development in 2017

“ It is not given to human beings ... to foresee or to predict to any large extent the unfolding course of events .” — Winston Churchill

Following the unexpected results of

the U . S . presidential election in
November , U . S . franchisors that our company assists in taking their franchises global , asked us to assess the impact on international franchising in key countries . We analyzed
240 articles , studies , and reports issued since the election that focused on doing business internationally
, specifically international franchise development .
First the good news . My 42 years of living in 7 countries and doing business in a total of 70 countries demonstrates that things are really the same : always changing
. The key is to know what is going on around the world to determine the best countries to take your franchise
, now and in the near future . While it may appear that the world has become a more unpredictable place to do business , excellent potential remains for signing international area licenses and master franchises in 2017 .
As we look at countries that are active for franchising we have to take into account the global impact of major 2016 economic and political developments such as : the Brexit vote in the U . K ., the U . S . elections , Middle East turmoil , the potential for lower taxes and less business regulation in the U . S ., the rise of the dollar relative to other major currencies , and the rise of nationalism around the world . Many countries have begun looking more inward and becoming anti-globalization . In addition to the developed countries , a
number of developing countries began to see the aging trend accelerate , leaving fewer working to pay the pensions of senior citizens . Social media continued to grow as a communication and consumer tool with almost 2 billion Facebook users worldwide at year ’ s end . Lower oil prices caused some Middle East oil-producing countries to cut government salaries and subsidies .
The price of oil ranged from US
$ 30 to US $ 50 per barrel . War raged on in parts of the Middle East with millions of refugees from North Africa and the Middle East entering European countries
• Free trade and the new U . S . president . Canada ’ s prime minister and Mexico ’ s minister for the economy both said the week after the U . S . election that they were open to “ modernizing ” NAFTA . The proposed trade policies of the new U . S . administration could cause some countries to put up barriers to entry for U . S . brands .
This must be watched very carefully when deciding which countries to market your franchise into in 2017 .
• The strong U . S . dollar and franchise fees and royalties . A strengthening U . S . dollar is making U . S . company earnings less valuable . Franchisors find it harder to charge high up-front license fees because of the impact of the strong dollar on local currencies . For example , an up-front fee of US $ 250,000 that translated to £ 170,000 at the start of 2016 is now £ 207,000 . Franchisors are also seeing lower U . S . dollar royalties from international licenses , despite the licensee ’ s same store sales increasing year to year in local currencies . One of the
U . S . food and beverage franchise companies we work with saw a 15 percent reduction in royalties from their licensee in an Asian country this year — even though the local restaurants had same store sales growth of more than 10 percent in local currency .
• The Americas . Argentina , Chile , and Peru are a tale of three countries . The socialist government in Chile has seen lower annual GDP growth and more business taxes and regulations . This has discouraged bringing foreign franchises to the country . Argentina had a major government change at the start of 2016 and is seeing a resurgence of investment optimism , which should result in new foreign franchises entering the country in 2017 – 18 . Peru also had a 2016 presidential election that resulted in a pro-business , lower-tax government that has resulted in the highest GDP growth in the Americas . U . S . food and beverage franchises are especially sought in this country . On the other hand , the 2017 forecast for Mexico ’ s GDP growth is an anemic 1.8 percent . And the fears to the Mexican economy over the trade policies of the new U . S . president have effectively stopped new franchise development .
• Asia . China is slowly but surely moving its economy up the value chain to produce and assemble many of the inputs it once imported , with the intent of increasingly selling to itself . China is in the early stages of a protracted shift toward an economic growth model grounded in private consumption and high value-added manufacturing . But it will be many years before consumption becomes China ’ s engine for growth . Meanwhile , the Chinese government continues to add more regulations and taxes that limit profitability for licensees of foreign franchisors . The new populist Philippines President , Rodrigo Duterte , has turned away from the West and embraced China and Russia as economic partners . As a result , foreign direct investment in the Philippines shrank by 41 percent from a year earlier . Recently , the Philippine peso slumped to an eightmonth low against the U . S . dollar , and to its lowest rate in 7 years . S & P Global Ratings warns of “ rising uncertainties surrounding the stability , predictability , and accountability ” of the Duterte administration . This may hurt new franchise development in a country that has been a star the past few years .
• Europe . In June 2016 , the U . K . voted to leave the European Union after more
62 Franchiseupdate ISSUE I , 2017