EP Grow Your Franchise Base PwC

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PwCPwC

Offshore Market EntryStrategies

China, Vietnam & SouthKorea

August 2006PricewaterhouseCoopers,Australia



Pa e 1PricewaterhouseCoopers

1. Why Australian companies

expand offshore

2. Market entry considerations

3. Optimal business structures

4. Market entry challenges

5. Contact details



Why Australian companies expand offshore


More than 1//3 of

Australian franchisors

have expanded their operations overseas

in recent years

Capability extension and serviceexisting customers

• Leverage existing brand, assets,

IP, capabilities and skills to generate new

revenues and economies of scale

Emerging economies

• Growing discretionary spending patterns

• Increasing adoption of foreign brands

• eCommerce and communications sector

growth

• Improved regulatory and IP environments

11

30

32

48

82

Access to skills

Increasing capacity

Reducing costs

Serve existing

customers

New customers

Why developing market are attractiveto Australian & Asian businesses • China – M&A deals

↑ 24% in value

over 2004/05

(focus: FS, Dist’n

& Telco sectors)

• South Korea - 35

million of the

population of 48.2

million people has

a mobile phonesubscription

• Vietnam – one of

the youngest

populations in

East Asia, with

70% under 35, this

demographic is

showing a clear

preference for

foreign brands

Local market maturity

• Compared to Australia, strong economic

growth within China, Vietnam and South

Korean markets

• China is world’s fastest growing economybetween 03-04 at 9.5%, FDI growth forthis period highest for China and SouthKorea

3.34.5

7.2 7.7Forecast GDP growth[1]

06-07

AUS KOR VIE PRC

Notes [1] GDP growth for Australia 2006 – 2010, others calculated as average of 2006 & 2007 growth“ ” “ ”



PwC market entry methodology

TargetIdentify Select

• What is the

potential ‘size

of the prize’?

• What are our

capabilities todeliver?

• What are our

potential

acquisition/partnership

requirements &

opportunities?

Stakeholder Communications (internal & external)

K e y

q u e s t i o n s

Design

Build

Implement

Manage &Measure

• What are the

critical first

steps?

• How can we

mitigate keyrisks?

1 2 3

Plan &Mobilise

4 5 6

7

8

• Which

markets

present

attractive

growth

opportunitiesfor us?

• Which

markets best

align with our strategy &

capabilities?

• What are our

growth

objectives?

• How will we

achieve them(organic/

inorganic)?

• Which markets

can we targetfor growth?




China opportunities, themes and challenges

Opportunities

• Changing regulations

• Intellectual property

• East coast vs. inland

• Joint Venture changes

• Localisation and blending

Current Themes

• Consumer market

trends

– Complexity and needs

– Growing middle class

– Home and car

ownership

– Price

– On-line convergence

– Location

Challenges

• Contracts & Partners

• Supply chainobstacles

• Finding & keeping

good staff /

franchisees / business

partners

• IP protection

• Regulatory

environment

4

3

9

14

7

5 8

501995

2004

38

14

7

10

1012

6

Average household

consumption Food

HSLD facilities,articles & services

Transport, post &comms services

Residence

Clothing

Medicine &medical services

Recreation, education& cultural services

Miscellaneous

Pa e 4PricewaterhouseCoopers Source: PwC “From Bein to Buda est” & “Retail & Consumer Outlook”



South Korea opportunities, themes and challenges

Opportunities

• FDI and Tax Incentives

• Social infrastructure accessibility

• Mass customisation

• Emotional consumption

Current Themes

• Consumer market

trends

– Consumer

sophistication

– Consumer innovation

take-up

– Polarisation of

incomes

– eCommerce

Challenges

• Competitive

environment

• Customer need

variability

12

5

95 8

54

4

2820

1995

2004

511 5 5

45

318

17

27

Food

Housing

Fuel, light &water charges

Furniture & utensils

Clothing & footwear

Medical care

Education

Culture & recreation

Transport & Comms

Miscellaneous

Average householdconsumption




Vietnam opportunities, themes and challenges

Opportunities

• FDI

• WTO accession

• Large, growing and young population

• Income growth

Current Themes

• Consumer market

trends

– Increasing gap

between rich and

poor

– Shopping habits

– Brand and luxury

goods preference

Challenges

• Legal and regulatory

environment

• Import tariffs

• Outdated

infrastructure

• Intellectual property

protection

• Media regulation

• Skilled labour

• Property & land

access

0

20

40

60

80

100

120

1993 2000 2001 2002 2003

Share of total Vietnamese market by sector

percent

State owned

Private

Foreign invested




Market entry considerations

Operations

Go To Market Model

Supply Chain

Management & BusinessPartners

• Product customisation costs, pricing, sourcing and distribution costs• Country regulatory and legal impacts on operating costs

• Market segmentation and targeting, sales team structure and targets,

channel strategy and branding

• Sourcing quality materials which offer reliable, cost-effective

transportation and logistics are critical in protecting brand integrity,

customer loyalty and supported overall growth

• Determining the optimal mix of local and foreign expatriates• Local talent recruitment and retention

• Partner sharing criteria and commercial arrangements

Financial Management

Doing business locally &

legally

Intellectual

Property

• Financial outcomes scenario planning

• Funding and structuring (incl. equity arrangements)

• Financial reporting and metrics• Leverage local experts for legal and regulatory advice

• Asset protection and profit repatriation considerations

• Protection of brand name, trademarks, web addresses and know-how

• Confidentiality agreements to protect intention and commercialities




Finding the optimal business structure


Organic

Growth

• With almost 700 franchisees in Australia and NZ, Bakers Delight

decided its overseas expansion strategy would be to set up its own

operations in Canada before embarking on franchising

Master

Franchise

• By November 2004, Catridge World was reported to have opened 600

locations and now has 1,077. The key to their rapid was theestablishment of master franchise territories. The master franchisee

promotes and develops the Cartridge World franchise system, in

addition to recruiting, assisting and managing new franchisees

Joint Venture • In November 2005. McDonalds opened it’s 81st location in India. As

local regulations severely restricted its access to capital, technology

and management, McDonalds entered into a 50-50 JV with two local

Indian companies

Acquisition • In December 2004, Gloria Jean’s Coffee Australian master franchisee

acquired the global rights outside the US from the franchisor

Leveraging

existing brand

• Pizza Hut’s growth in China relative to its main competitor, Domino’s

Pizza, has in part been attributed to the success of its stablemate,

KFC. KFC was a pioneer in the Chinese market and Pizza Hut was

able to benefit from its understanding of local culture, marketing

conditions, supply chain logistics and supply partners andarrangements

According to a

2004 Industry

Survey,Australian

franchisors

held on

average 33

franchisedunits before

expanding

their franchise

overseas

Source: PwC “From Bein to Buda est” & “Retail & Consumer Outlook”



Typical market entry challenges


Challenges & Risks of Offshore Expansion[1]

• Lack of local market research

• Shortage of high calibre local management

• Underestimating government relationship management

requirements

• Not tailoring to local customer needs

• Unfamiliar regulatory environments

• Difficulties in leveraging scale from the home office

• Monitoring offshore delivery and quality

“It is important to

know what it is youdon’t know in China”

Graham Stuart, Fonterra

Notes [1] Sources: PwC client experience and research including: BRW, ‘Born Global’, December 2005; BRW, ‘Along the Silk Road’, September 2005;AXA Asia Pacific Growth Strategy, Asialink presentation, May 2006



Key messages & summary

T A

K E A C T I O N

Build a solid case

Concentrate your energies locally if you are still in the early days of growing your domestic

market

Research your market

Research international markets

Leverage local experts

Review major US franchise businesses

Review your product offering and strip low value features

Find the right model

Investigate different strategies for overseas expansion

Select partners who genuinely complement your business

Carefully select Managers who have well-rounded experience

Address issues affecting international expansion




Contact details


Michelle Fitzgerald

Director,

Performance Improvement

+61 3 (0)431 90 30 18

[email protected]


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