Overseas growth, economy top of mind at IFA convention

The opportunities for international expansion and the obstacles of an uncertain U.S. economy were dueling themes of the 53rd annual International Franchising Association convention in Las Vegas this week.

The five-day event drew more than 3,600 members of the franchising community to the MGM Grand Hotel and Casino, where they heard keynote speakers including former U.S. Secretary of State Condoleezza Rice; Andy Puzder, chief executive of CKE Restaurants Inc.; and Rick Silva, chief executive of Checkers Drive-In Restaurants. They also networked, toured the exhibit hall and attended educational sessions on everything from working with celebrities as franchisees to making the most of social media.

Steve Caldeira, IFA’s president and chief executive, outlined the state of franchising on Monday, noting that key issues in Washington this year will be the impending healthcare mandate, taxes and regulation, and immigration reform.

Priorities for the association will be building a “Franchise Congress” with members of the franchise community across the country that are willing to work with lawmakers in their respective turf.

The IFA also has the goal of building financial support for its FranPAC political action committee to $1.5 million by 2014, said Steve Romaniello, IFA chairman, managing director of Roark Capital and chairman of the board of Focus Brands Inc.

And the IFA is working to build its base of franchisee members, he said, hoping to grow the number of multi-unit franchise operators across the U.S. Currently, the IFA represents about 1,271 franchisors across all industries, but only about 300 to 400 franchisees that are actively engaged.

The IFA is projecting modest growth for franchise companies in 2013.

On Wednesday, the association said its Franchise Business Index, which tracks the economic health of the franchising industry, saw an uptick of 0.7 percent in January to 109.7, an increase of 2.1 percent over January 2012.

Steve Caldeira, IFA’s president and chief executive, said the increase reflects pent-up demand for growth felt by many franchisors and franchisees who held back on investments in the second half of last year because of uncertainty over the then-threat of the “fiscal cliff.”

“With permanency in tax rates, albeit higher for some small business owners, and steadily improving credit conditions, combined with low interest rates and less expensive commercial real estate, we expect the franchise industry will add over 10,000 new establishments and 162,000 new jobs this year,” Caldeira said.

Nationally, the estimated 825,000 franchise businesses account for one in eight private sector jobs, according to the IFA. Franchise businesses also contributed more than $460 million in gross domestic product in 2012, or about 3.4 percent of the nation’s total GDP.

“We like to say we’re building local businesses, one opportunity at a time,” said Caldeira.

Rice, in her keynote speech, said the No. 1 priority on the nation’s “to do” list is “getting this economy going again,” and that it will take leadership by the private sector.

What’s needed, she said, is more certainty about the rate of regulation and taxation so that employers can feel more confident about hiring again.

Franchisees eye international growth

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Growing overseas was clearly a topic of interest during the convention, with attendees packing standing-room-only into sessions offering insight.

Of the Top 200 franchising chains in the U.S., 34 percent of their units are now in other countries, and that number is expected to climb, said Philip Zeidman, senior partner with DLA Piper LLP. “For those of you who are not yet international, the writing is on the wall,” he said.

Nearly 80 percent of IFA members franchise internationally, for example. The trend has been fueled in part by lack of access to credit in the U.S. through the recession, but also growing affluence in foreign markets and increasing acceptance of Western brands, particularly by young people, said Zeidman.

Steve Devine, president of Johnny Rockets’ international division, emphasized the need for doing research into potential markets, tapping into data offered by the Central Intelligence Agency, as well as sources like Euromonitor and the International Council of Shopping Centers.

In addition to the laws specific to each country, franchisors should understand the various quirks of specific regions. Russia, for example, is known for red tape, so patience is required. “It’s a painful place to do business and a corrupt market,” Devine said.

In Asia in general, Devine said, “An agreement is never really an agreement.” And trademark and patent risks exist everywhere. Johnny Rockets is still battling a trademark issue in Brazil, where a competitor opened a virtually identical restaurant called “Rockets.”

Key in any decision to branch out internationally is identifying risks, like whether there is an existing supply chain and how cash will be repatriated.

But the most important factor is finding the right franchise partner overseas, he said. “It takes a brand champion to sell your brand internationally.”

Jeff Brimer, special counsel with Faegre Baker Daniels LLP, outlined legal hurdles for international franchising, urging franchisors to proactively and aggressively protect their intellectual property. Seek out local counsel to be sure you’re complying with country-specific laws and regulations, he said, but also be aware of U.S. laws that affect international business, such as the Foreign Corrupt Practices Act, the Patriot Act and various export/import regulations.

 “Be prepared for things to take longer,” said Brimer of international growth. “And plan for contingencies.”

The annual IFA convention will be held next year in New Orleans.

Contact Lisa Jennings at [email protected].
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