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Winning world markets

01 April 2005
Winning world markets

The seismic political shifts of the past 15 years mean that opportunities for overseas expansion of UK chain operations have never been greater. Sustained economic progress in developing countries, an ideological U-turn in China and the collapse of the Soviet Union mean more than half of the people on the planet now live in economies with a fresh appetite for Western brands.

For UK chains looking to expand out of their traditional markets, the figures look mouth-watering - China alone is said to have an emerging middle class as numerous as the entire population of the USA, and an eating-out market worth a staggering 110b a year.
From the former Eastern Bloc countries to the Indian sub-continent, from the Far East to the Middle East, an unstoppable tide of economic liberalisation is creating real economic growth, and with it comes new consumers - there are now 320 million people with mobile phones in China and 50 million in India.

So how difficult is it to take a UK chain operation to a newly Westernised economy, and what obstacles will need to be overcome to get there?

Probably the biggest challenge posed by emerging markets concerns standards of corporate governance and the rule of law. Other key areas that need thorough investigation before making a commitment are market research, consumer trends, competition already in the marketplace, labour costs and laws, security issues, tax structures, and the ease with which it is possible to get money out of the jurisdiction.

Add to that list the obvious difficulties presented by language barriers, planning and regulatory issues, and the protection of intellectual property rights, and the need for a partner with specialist local knowledge becomes all too apparent.

Jon Lake, director for tourism, hospitality and leisure at global accountancy and business consultancy Deloitte & Touche, who in a varied career has also run pubs, bars and restaurants, makes his recommendations. "Firms should create a scorecard with all these criteria and see how their model sits in each country," he says. "You are then able to take a balanced view on a particular market."

Security and corruption are major concerns for overseas investment, Lake says, particularly in Russia and the former Soviet Union satellite states, although less so in the Far East. "Russia is held up as a growing market," he says, "but there is still evidence of security issues related to organised crime."

Hospitality industry consultant Alan McGuigan, who has worked in a number of Eastern Bloc countries, agrees. "You need to be careful how you pick your local partners, otherwise you can lose your shirt," he says. "You could find the local mafia simply taking over your operation, and going to the police won't help because they will be the same people."

Stress-testing the legal and tax framework of any country to be targeted is obviously crucial. Emerging markets are liberalising - in December 2004, China introduced new franchise laws that allow full foreign ownership of franchising businesses for the first time. But complexities abound. In China, for example, tax varies from province to province, giving a combined state and local tax take of 20-40% of profits, dependent on location.

Understanding the business culture of a country is key to success, and this is an area where consultants experienced in the particular economy can assist. While, in the West, we expect public officials to dispatch their duties in an even-handed way, this is not the case in many emerging markets.

Suwei Jiang is manager of PricewaterhouseCoopers' China business centre. "In Far Eastern countries such as China," she says, "the legal system is not perfect, so success is dependent on who you know. The way to make sure you can get around problems relating to protection of intellectual property rights, planning and regulatory issues is to establish strong relationships with local and central government officials. You will have to entertain these people, and get the right people to introduce you
to them in the first place."

There are essentially three ways of taking a UK business into emerging markets - as a wholly owned subsidiary, through a joint venture or under a franchise agreement. Which is the most suitable will depend on the type of business and the laws and regulations in place in the country.
For many companies, the route into a market that exposes them to the least risk is through a partnership with a local operator. Indeed, many countries still refuse foreign investments without some local involvement.

A franchise model is clearly convenient, but the success of the venture will depend on the quality and suitability of your franchise partner and the appetite for the country's legal institutions to enforce the agreement.

Costa Coffee marketing director David Hutchinson is taking his company into China, India and Pakistan this year. He sees the franchise route, where partners pay a percentage of sales but retain responsibility for all local outgoings, as offering the best potential reward for the least risk. "Our franchise partners have a deeper understanding of local legislation, regulations and the employment market than we do," he says.

In May, Costa will open the first of three outlets in New Delhi through a franchise partner, with plans for as many as 300 stores within the next six years. Costa has also had a representative in China for the past six months, and is in advanced negotiations with a number of franchise partners for as many as 1,000 outlets across the country.

"Both China and India are seeing a massive growth in the middle class, and we think there is potential for our brand to achieve in excess of 1,000 outlets in India and double that in China," says a confident Hutchinson. "We expect to cover our costs very quickly - the only money we are putting into it is time at head office, consultants and plane tickets. We should be breaking even within two years."

Franchising can bring with it issues over brand damage, if a partner performs poorly, and also places obligations on the franchisor - principally maintaining standards of training and supplies.

Yo! Sushi chief executive Robin Rowland is extremely wary when agreeing franchise deals. "We get around 300 approaches a year in the UK and overseas," he says. "But once we have decided the business plan can make money, we always have to ask ourselves whether the other party shares our values of hospitality and service."

For Yo! Sushi, going into the Far East would be akin to taking coals to Newcastle. In the Middle East, though, the company is this year opening a number of restaurants, and it has plans to add a total of 15 to its French and Greek operations within five years.

"We have decided we are not going into Italy or Russia, because we can't get a straight answer out of anybody," says Rowland.

Choosing the right business partner for a joint venture or a franchise can be made easier by using consultants who are already operating in the country and who know the market. Many countries also have centrally funded agencies which specialise in funding joint ventures with foreign investors.

Consultants can assist a company's entry plan by arranging market research among the target consumer group, evaluating the competition and dealing with brand issues. "You need a niche to get into Oriental markets - Starbucks had no problem because it represented the Western style of life," says Jiang. "But it is more difficult for sit-down restaurants than fast-food operations and coffee bars, because competition from indigenous restaurants is strong."

But Robert Milburn, UK leader of hospitality and leisure practice for PricewaterhouseCoopers, points out that expatriate communities are mushrooming, providing a bridgehead of demand for Western brands. "PwC itself is a case in point," he says, "its Chinese operation having grown in seven years from a handful of representatives to 2,500 professionals, all used to eating out."

While the route to emerging markets may be fraught with difficulties, the prospect of more than three billion potential new customers makes it a route that some UK operators will wish to take. This is an exciting time for the world economy, and anybody who misses the boat may live to rue the day.

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