Franchising could be the way forward for retailers looking for overseas expansion, according to the latest King Sturge report on European retail market.
It says that franchising remains the most popular means of overseas expansion, especially among high street retailers (as opposed to food and retail warehouse operators).
Franchise agreements vary from retailer to retailer (and, indeed, from store to store), but
underlying commonality is that they are low-risk but relatively low-return.
King Sturge says that although the appearance of key international brands (particularly in the luxury goods sector) in high streets and shopping centres around the world generates good headlines and attracts consumer interest, the fact remains that franchises are little more than licensing agreements.
There are instances of retailers buying out their franchisees. These include Inditex of Spain, which includes Zara, Massimo Dutti and Bershka in its portfolio of brands.
One of the few truly global retailers, the company operates both company-owned and franchise stores. In some markets, it has actively bought back its franchise and invested its own money in the local business.
An example of this was Russia, where the company opened six franchise stores in partnership with Finnish department store group Stockmann. In 2006, Inditex bought out its franchisee for a reported €42m, in order to commit its own resources to the venture.
King Sturge says that while the low-risk nature of franchising is likely to remain attractive to internationalising retailers for some time to come, the next stage in the evolution of the European market will hopefully see more high street retailers committing company resources to establishing and operating their own store networks in overseas markets.
The report continues: “The property market also has an increasingly significant role to play in the franchising process. As occupier markets have become more challenging,
landlords and developers are seeking innovative solutions to traditional leasing practices. “The concept of landlords becoming retailers themselves has been touted, although this does invoke a certain sense of fear – property ownership and management require very distinct disciplines from sourcing goods from suppliers and selling them to the public.
“But adopting a franchising system could provide a happy compromise. With the landlord adopting the role of franchisee, this could potentially smooth over any of the traditional owner versus occupier disputes, as well as filling space within schemes
and offering shoppers in that centre a brand that was otherwise lacking.
“The concept is still very much in its infancy, but if it develops, it could prove both an innovative approach and one which acts as a conduit for further international expansion among retailers.”
