HOT FOREIGN MARKETS FOR FRANCHISE EXPANSION IN 2013
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HOT FOREIGN
MARKETS FOR
FRANCHISE
EXPANSION
IN 2013
PANEL
Robert Shaw Right at Home International
Executive Advisor, International
Business
Mike Brennan DLA Piper LLP
Partner
Scott Chorna FOCUS Brands Inc.
Director of International New
Business Development
Ken Levinson Faegre Baker Daniels LLP
Partner
2
WHAT IS A HOT MARKET?
• The markets where new franchise
agreements are being signed
• The markets in which existing brands
are expanding rapidly
• The markets where existing
brands/outlets are enjoying strong
performance
3
MARKET FORECASTING METRICS
Market Characteristics
Economic Indicators
Commercial Factors
Government Issues
Population
Total GDP GDP per Capita
Purchasing Power
Ease of Market
Entry
Political Stability
Demographics
Growth Rates
Ease of Doing
Business
Regulatory Issues
% Urbanization
Inflation Rates
Franchise
Environment
Tax Issues
Consumer Spending
Levels
Economic Stability
Brand Viability
Corruption Index
4
SOURCES OF DATA
• www.imf.org
– Country Info
• www.economist .com
– World in Figures /
Countries
• www.fraserinstitiute.org
― Economic Freedom
• www.heritage.org
– 2013 Index of Economic
Freedom
• www.cia.gov
– Country Reports
• www.franchise.org
– International Section
• www.export.gov
– Country Commercial
Reports
– Other Market Reports
• www.worldbank.org
– Country and Data Bank
Sections
5
• Major QSR brands – company owned
– YUM!, McDonalds, Starbucks
• QSR franchising
• Full Service / Fast Casual F&B,
• Automotive Services, Business Services,
Children’s Education & Professional Training,
Specialty Retail
• Lodging, Real Estate
• Consumer Services – personal and
residential
TYPICAL PROGRESSION OF U.S. FRANCHISES
INTERNATIONALLY
6
7
2012 TOP QSR MARKETS
8
2012 TOP FAST CASUAL AND FULL SERVICE RESTAURANT
MARKETS
9
2012 TOP MARKETS FOR SERVICES AND RETAIL
10
FINAL LOOK AT 2012
Middle East
• QSR
• Casual dining
• Home furnishing
• Apparel
Latin America
(Mexico, Chile) • QSR
• Casual dining
• Apparel
Asia Pacific • F&B
• Lodging
11
TAX AND LEGAL
CONSIDERATIONS
TAX CONSIDERATIONS
• What are some of the key tax issues when
going overseas? – US taxpayers are subject to current US tax on their
worldwide income
– Is the US franchisor deemed to be “doing business” abroad,
or have a “permanent establishment” (nexus) locally?
– Does a tax treaty apply?
– Are the various fees payable by the local franchisee
subject to local withholding tax, and at what rate(s)?
– Does the US franchisor/payee have the ability to currently
use the foreign tax credits for withholding or other taxes
paid abroad?
13
TAX CONSIDERATIONS (CONT.)
• Withholding taxes – Collected at the source; depends on definition of
taxability under applicable law
– Payor acts as collection agent for tax authorities (with
independent penalty exposure)
– Foreign tax credits available in US for creditable
foreign taxes paid or withheld via treaty or local law
– A “direct credit” against the US income tax owed by
recipient, who must report full amount of income
• Example: $100 of royalty income subject to 10% withholding:
Franchisor gets $90 in cash (but reports $100 as royalty income) plus a US tax credit for $10
14
WITHHOLDING TAXES (CONT.)
– A tax “gross up” puts burden of withholding tax on payor/franchisee • Same Example with gross-up: franchisee pays $111.11
as grossed up royalty, withholds required 10% tax ($11.11) and remits $100 net cash to franchisor; franchisor reports US income of $111.11 and gets a tax credit of $11.11
– Applicable treaty will lower withholding rates from normal law; if no treaty, local law (rates and definitions) apply • US statutory withholding rate is 30% (absent treaty)
– “Royalties” - Usually defined to include payments for use or right to use IP in local jurisdiction; treaties and local law provide other terms
15
WITHHOLDING TAX
US Treaty Country
Withholding Tax on
Royalties Additional definitions
Russia Exempt industrial, commercial or scientific experience (know how) (ICSEx)
India 10%/15% industrial, commercial or scientific equipment (ICSEq) (10%); patent/TM/copyright, ICSEx (15%) [also includes fees for “included services”]
China 10% ICSEq and ICSEx
UK Exempt ICSEx
Canada 10%/exempt ICSEx (10%); software (OTHER THAN in connection with Franchise) (exempt)
Thailand 5%/8%/15% copyright/use of software (5%); ICSEq (8%); patent/TM/ICSEx (15%)
Turkey 5%/10% patent/TM/ICSEx (5%); ICSEq (10%)
Chile 2%/10% ICSEq (2%); copyright/TM/patent/ICSEq (10%) – UNDER PENDING U.S. TREATY (NOT YET RATIFIED)
Mexico 10% ICSEq and ICSEx
South Korea 10%/15% copyrights, media productions (10%); patents/designs/processes, knowledge, experience, skill (know how) (15%)
US Treaty Countries
16
WITHHOLDING TAX
Non-Treaty Countries
Country General Withholding Tax on Royalties
Brazil Local law only -- 15% (Tech Svcs taxed at 25%)
Singapore Local law only -- 10%
Saudi Arabia Local law only -- 15%
Costa Rica Local law only -- 25%
UAE Local law only -- 0%
Indonesia Local law only -- 20%
Chile Local law only -- 30% (pending Treaty to reduce)
Colombia Local law only -- 33%
17
PRACTICAL LEGAL CHECKLIST ITEMS
• Register your trademark in the target
country
• Assess the target country risk
• Vet your partner
• Get to know your partner
• Clarify deal terms in some detail early
on
18
PRACTICAL LEGAL CHECKLIST ITEMS
• Consult target country counsel early
on to get the “lay of the land”
• Determine if any material legal
restrictions or hurdles
• Control drafting of the contract
• Determine if any registration, disclosure
or licensing requirements apply
19
Copyright © 2011 DLA Piper. All rights reserved.
LAWS APPLICABLE TO FRANCHISING (AUG. 2012)
Blue = Disclosure Law Green = Relationship Law Red = Disclosure & Relationship Laws Black = Other
The Americas Barbados Brazil Canada Alberta New Brunswick Ontario Prince Edward Island Mexico United States Federal Several States Venezuela (competition law)
Europe EU (competition law) Within EU Belgium Estonia France Lithuania Italy Romania Spain Sweden
Non-EU Albania Belarus Georgia Moldova Russia Ukraine
Central Asia Mongolia Kazakhstan Kyrgyzstan Turkmenistan
Asia China Japan Macau South Korea Taiwan Vietnam
The Middle East Saudi Arabia (commercial agency law)
South Pacific Australia Indonesia Malaysia
Does Not Include:
• Codes of conduct which do not provide for governmental or private enforcement, even if promulgated under governmental authority.
• Bodies of law (e.g., competition, intellectual property, etc.) which also cover franchising, unless explicitly mentioned.
Africa South Africa Tunisia
20
BRIC MARKETS
21
UNDERSTAND THE RISKS
• Global Competitiveness Report
– Only China is listed in the Top 30 (#29)
• Ease of Doing Business Index – China #91
– Russia #112
– Brazil #130
– India #132
• Detailed legal process for franchise registration – Costly and time consuming
22
95,4%
Nº COUNTRY TOTAL OF BRANDS
1º South Korea 2.400
2º United States 2.300
3º China 2.200
4º Brazil 2.031
5º India 1.500
6º France 1.477
7º Turkey 1.450
8º Japan 1.246
9º Canada 1.200
10º Australia 1.051
Source: WFC
WORLD RANKING 2012 - WFC
23
COMMON CHARACTERISTICS
• Very aggressive and strong positions
for large chains usually through direct
investments or JV’s
– McDonald’s
– KFC
– Starbucks
• Higher expectations for international
brands in terms of overall value
– Upscale environments of major QSR
brands as compared to their US stores
24
WHAT DO YOU LIKE ABOUT WESTERN RESTAURANTS
COMPARED WITH CHINESE RESTAURANTS?
25
16%
19%
26%
29%
31%
40%
46%
52%
Dessert and/or beverage options
Healthier menu options
Cultural attraction
Better taste of food
Try something different
Better services
Better atmosphere (music, décor, etc.)
Clean or better environment
Those Preferring Western Restaurants Cite the Cleaner Environment and Better Atmosphere as Key Differences from Chinese Style Locations
COMMON CHARACTERISTICS
• Favorable demographics
• Rapid growth of shopping malls and
“modern retail”
• “Regional” specialization • With FOCUS on key major urban centers
26
BRAZIL
27
BRAZIL • Very high import duties
• Dominant position of local concepts in franchising
• Development of infrastructure with coming of World Cup (2014) and Olympics (2016)
• Strong categories – Burgers
– Coffee/Café
– Frozen Yogurt
28
Ranking 2012: Network Size – FOOD SECTOR
Source: ABF
Rank Brand Segment Total Units
1 MCDONALD´S Food 1260
2 SUBWAY Food 836
3 BOB´S Food 820
4 CASA DO PÃO DE QUEIJO Coffee, Drinks & Snacks 438
5 GIRAFFAS Food 359
6 HABIB´S Food 344
7 REI DO MATE Coffee, Drinks & Snacks 328
8 KOPENHAGEN Coffee, Drinks & Snacks 296
9 GRÃO ESPRESSO
CAFETERIA Coffee, Drinks & Snacks 285
10 SPOLETO Food 258
29
National Networks
94,5%
5,5%
106 Foreign Concepts operating in Brazil
INTERNATIONAL PRESENCE IN BRAZIL
Foreign Networks
30
RUSSIA • Cinnabon
– Started in 2009
– Opened over 90
bakeries in less than
3 years
– Master Franchise
model with many
local sub-franchisees
31
RUSSIA • Currently least developed of the BRIC
Markets
– Many chains opened in 2011 and 2012
• Very strong McDonald’s market
– One of top 10 countries by average sales
volume
32
INDIA QSR’S Approx. No. of
Outlets Expansion Plans
Café Coffee Day 1400 20-25 cafes every month
Domino's Pizza 378 500 outlets 2012
McDonalds 200 300 outlets by 2012
Pizza Hut 170 200 outlets by 2012
US Pizza 90 100 outlets by 2012
KFC 107 1000 outlets by 2014
Yo-China 43 200 outlets by 2012
33
INDIA • 95% of fast-food market is “traditional”
retail – Huge market to tap
– 36% growth in 2012 • Led by big brands
• High import duties for almost all products – Ability to local source as much as possible
key
• Ability to hit key price points and value measures are very important
34
INDIA
Country Price of Big Mac (USD$) Rank
India* $1.62 Cheapest in the world
Russia $2.15 4th cheapest
China $2.44 6th cheapest
Brazil $5.68 5th most expensive
USA $4.20
Big Mac Index
35
INDIA • Menu localization
– No beef or pork on most menus
– Strong vegetarian presence
– Heavy use of local flavors and spices
36
CHINA • Just ask YUM!
– Total 5400 units in market
– “…that there was plenty of room for growth in
China, particularly in smaller cities where middle-
class populations are expanding. The said growth
was expected to be stronger in the back half of
2013.”
– “This year, Yum plans to build 700 restaurants in
the country. Last year, the company had
predicted it would build 650 but ended up
building more than 800.”
AP News: KFC parent stock falls after warning of China drop 37
HOT MARKETS
FOR 2013
2013 HOT MARKETS
“In which countries are you seeking
master licensees?”
• Source: 2013 Annual Franchise Development Report
by: Franchise Update Media Group – Responses from 106 US franchisors
– Survey taken in August-September 2012
39
% OF RESPONDENTS
52%
40%
30% 25%
22% 19%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Canada Australia, India
China, Brazil, UK, NZ
Indonesia, Mexico,
Philippines
Costa Rica, Germany, Singapore,
Korea *
Italy, Russia, Japan, S.
Africa, Spain * 40
MIDDLE EAST AND NORTH AFRICA
19% 15%
11%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Jordan, Kuwait, Turkey Saudi Arabia, UAE, Syria Algeria, Bahrain, Egypt, Iraq, Lebanon, Libya,
Morocco
41
WHAT TO LOOK FOR IN 2013
Hot Signs
Growing, stable
economies
Asia, Latin America
Young and growing
populations
Africa, Latin
America, India
Caution Flags
Political Instability
• Middle East, North
Africa
Stagnant economic
growth
• Euro Zone
42
GLOBALVUE™ - COUNTRIES AS
PLACES TO FRANCHISE IN 2013
© EGS LLC, 2013 43
EMEA
2012 GDP 2013 GDP
Country Growth % Growth % 2013 Comments
Egypt 2.2 2.9 F&B, Retail, Education/Training
Euro Area (0.4) (0.1) Difficult environments; Strong differentiation, niche & USP needed
GCC (KSA) 5.7 4.1 F&B, Retail, Education/Training
Germany 0.8 0.6 Highly developed market; Strong niche/USP - Services
Italy (2.2) (0.9) Highly developed market; Strong niche/USP - Services
Russia 3.7 3.6 F&B, Business services, Adult training
Spain (1.5) (1.7) Very difficult investment climate
Turkey 3.2 3.8 Strong F&B brand, Education/Training, Business services
UK (0.1) 0.7 Low finance availability; Flexible approach to market required
44
THE AMERICAS
2012 GDP 2013 GDP
Country Growth % Growth % 2013 Comments
Brazil 1.0 3.5 F&B; Retail brands, Service and Education/Training
Canada 2.0 2.0 Strong service models; Strong F&B brands
Chile 5.4 5.7 F&B, Education/Training
Colombia 3.8 4.3 F&B, Education/Training, Retail
Costa Rica 4.8 4.3 F&B, Education/Training
Mexico 4.0 3.7 Strong F&B brands, Education, Some personal services
USA 2.2 2.0 Slow growth, major changes in HR factors
45
ASIA PAC
2012 GDP 2013 GDP
Country Growth % Growth % 2013 Comments
Australia 3.4 2.8 F&B and Services -Defined niche &USP; Payment terms
China 7.7 8.5 F&B, Education/Training and Retail; Service - early days
Hong Kong 1.7 2.9 Strong F&B brands, Education, Some Personal Services
India 5.4 6.5 F&B, Education and Retail
Indonesia 6.3 6.4 F&B, Education, Retail, Business Services
Japan 1.8 0.7 Highly successful F&B, Service, Education brands
Philippines 5.5 6.1 F&B, Education/Training, Business Services
Singapore 1.2 2.9 F&B, Education, Business services
S. Korea 2.2 3.3 F&B, Education/Training
Vietnam 4.9 5.4 F&B, Education/Training and Retail
46
2013 AND BEYOND
Soon to be HOT
Markets? • Afghanistan
• Tunisia
• Libya
• Egypt
• Columbia
• Turkey
Up & Comers?
• Iraq
• Mongolia
• Nigeria
47
APPRECIATION TO RESEARCH AND INFORMATION
SOURCES
• Edwards Global Services
• Franchise Update Media Group
• Franchise Times
• World Franchise Associates
• US Commercial Service
• World Franchise Council
• Brazilian Franchise Association
48
QUESTIONS?
49
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