International ExpansionInternational Expansion Strategies:  Choosing The Right Approach

International Summit Moderated By: Carl E. ZwislerSpeakers:  Ned Lyerly and

Thomas F. FlahertyMonday, February 14, 2011

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Ned Lyerly• Executive Vice President, Global Franchise 

Development ‐ CKE Restaurants, Inc.International Division– International Division

– International and Domestic Franchise System Growth

– International and Domestic Franchise Real Estate Support

• 27 year multi‐functional background including international, operations, finance, marketing, , p , , g,franchise support, real estate  and franchise sales

• Chairman of the International Affairs Committee t th I t ti l F hi A i tiat the International Franchise Association

• 5+ Million Miles on American Airlines

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Thomas F. Flaherty, CFE• Vice President, Franchising, Agile Pursuits

Franchising, Inc., a Procter & Gamble CompanyCompany– responsible for franchising for the Tide Dry

Cleaners and Mr. Clean Car Wash brands

23 ears of legal and franchising e perience• 23 years of legal and franchising experience– Papa John’s International, Inc.

• Vice President, Global Franchising• Vice President, New Business Development

– Huddle House, Inc.• Chief Development Officer

• Managed the signing of franchise deals for over 2,000 units on five continents

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Carl E. Zwisler• Principal Gray Plant Mooty• Principal, Gray Plant Mooty• 35 years representing franchisors and master 

franchisees in domestic and international f hi t tifranchise transactions

• Former IFA General Counsel• Author:

– Master Franchising: Selecting, Negotiating, and Operating a Master Franchise, Commerce Clearing House, 1999

– International Franchising: A Practitioner’s Guide, chapter “Selecting a Format for International Franchising”

h / f h i l d• Author/presenter of more than 100 articles and presentations on all facets of international and domestic franchising

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What Are The Right Goals For gInternational Franchising?

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• Sell products or services to un‐served “ t ”“customers”

• Expand distribution of products or iservices

• Optimize return on investment and i t id l dincrease system‐wide sales and generate incremental EBITDAS i t iti t d b• Seize opportunities presented by qualified prospective franchisees

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• Hedge against economic and political risks

• Obtain economies of scaleObtain economies of scale 

• Preempt competitors

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What Are The Options For International Expansion Strategies?

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• Company branch

• Direct franchise:  unit, area development, area representativep p

• Master franchise

• Joint venture• Joint venture

• Merger and acquisition

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Franchising FormatsFranchising FormatsArea Development Franchising

(multi unit franchising)(multi‐unit franchising)Franchisorgrants↓

area developerterritory

Franchise Unit 1By January 1, 

2012

Franchise Unit 2By July 1, 2012

Franchise Unit 3By January 1, 

2013

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• Area development agreement idprovides:

– Develop three units during next 12 hmonths

– Sign a unit franchise agreement for each

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Area Representative/Area Representative/Development Agent Franchise

• 3 parties– FranchisorFranchisor– Area representative or development

agentg– Unit franchisee

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D l A / ADevelopment Agent / Area Representative

Development Agent

Franchisor no contract

Franchisee

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Example 1

Master FranchisingFranchisorFranchisor

↓Master franchisee

↓↓territory

Franchise Unit 1By January 1, 

2012

Franchise Unit 2By July 1, 2012

Franchise Unit 3By January 1, 

2013

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Example 2Master Franchising

Franchisor↓

Master franchiseeMaster franchisee↓

TerritoryTerritoryMaster‐owned

Master‐owned

FranchiseUnit 1

FranchiseUnit 2

Area Developer

Schedule:  open at least 1 every six months

ownedUnit 1

ownedUnit 2

Unit 1 Unit 2 Developer

Unit 1   Unit 2

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What Considerations Dictate TheWhat Considerations Dictate The Strategy Selected For International Franchising?Franchising?

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• Resources of the franchisor

• Cost of adapting

• Resources and commitment of prospective• Resources and commitment of prospective partners

R l ti f f i hi th• Regulation of foreign ownership or other government regulation

• Size and profit potential of a market

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• Critical mass required to establish thebrand or to compete effectively in the market

• Distance from the franchisor's home or regional support office

• Cost of establishing a franchised unit• Tariffs, duties and other barriers to foreign ownership or operation

• Culture, language, climate, logistics, availability and cost of labor

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Where Are The Most Logical Markets To Begin International Expansion?p

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M k t With

• Desire/need for product or service

Markets With:

• Greatest numbers of areas with likely customerscustomers

• Proximity

C l• Common language

• Lowest risks of political and economic instability

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• High growth and qualified prospects

• Low effective tax rates

• High scores on World Bank's Ease ofHigh scores on World Bank s Ease of Doing Business survey

• No exchange controls and no barriers to• No exchange controls and no barriers to currency repatriation

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• Developed legal system allowing for enforcement of contracts

• Logistics/distribution/supply chain g pp yinfrastructure cultural fit of product or service

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Market Matrix – Latin America

Puerto Rico

Chile

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Mexico

Colombia

Dominican Republic

Peru

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roScore Brazil

ArgentinaUruguay

Costa Rica

El Salvador

Panama

BahamasGuatemala16

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FinalM

acr

ParaguayVenezuela

BoliviaHonduras

St Kitts

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Final Foodservice Score15 17 19 21 23 25 27 29 31

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What Is Needed To DevelopAnd Implement An International Franchising Plan?g

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• Support from board, CEO and/or founder

• Buy‐in from all departments which will support foreign development and operations

• International support organization (operations, training, marketing, supply chain/distribution finance I T legal)chain/distribution, finance, I.T., legal)

• Substantial investments in time and capital

R li ti ti h i f t d it• Realistic time horizon for return and unit growth

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• Threshold for patience in selecting the right franchisees in the right markets with the right positioning of th i ht d t d/ ithe right products and/or services

• Legal analysis, documents, budget, IP t tiprotection

• Market research to understand b bl t f t i dprobable costs of entering and 

developing a market

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• Franchise marketing plan and budget

• Due diligence on prospective franchiseesfranchisees

• Identification of top priority markets

D l t f f hi i t• Development of a franchising team with endurance and international b i / iti itbusiness acumen/sensitivity

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Thank you.

Carl E. ZwislerNed Lyerly

Thomas F. FlahertyThomas F. Flaherty

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