Philip F. Zeidman
Dateline: New York City
After two decades, the International Franchise Exposition is hitting its stride. The decision to move it to the Javits Center in this city, the self-proclaimed Center of the Universe, was a correct one: The impressive number of people, the quality of prospective investors, the level of discussion at the symposia all testify to that.
What’s also increasingly obvious is the growing focus on cross-border franchising. Even in seminars theoretically devoted to "neutral" subjects such as master franchising, the principal interest appears to be on franchising across boundaries.
It’s also apparent this gathering presents an occasion for a range of activities that are simply more sensible to hold here and now than at any other time and place: programs on private equity; on international topics in greater depth than would be possible in broader–scope symposia; the launch of a report on employment trends in franchising.
The list goes on: the meeting of the officials of the U.S. Commercial Service responsible for franchising in dozens of countries; visits by foreign officials seeking to build interest in commerce in their own countries; numerous foreign delegations; harbor cruises for international visitors; countless private receptions.
There are plenty of the usual mutterings, of course: the continuing shunning of the exposition by the very largest franchisors, who do not need such a venue to display their offers; the disproportionate number of franchisors who probably blew their marketing budgets on this show and who, if they are unsuccessful, will not be back next year. But such is capitalism, in all its messiness and glory.
And there are the inevitable glitches, even after all this time: late and inadequate promotion; scheduling programs for similar audiences in conflict with one another; continuing confusion as to the dates (and even the names of the functions); what was free and what was not; and the like. Notwithstanding all these shortcomings, it was clearly a success.
A single theme
It is always difficult to extract a single theme from these events (and, of course, most people have no need to do so; they are there to make one sale, establish one contact, glean one nugget). It seemed to me, though, that one message did make itself heard through the cacophony. It may have been muted, but it was unmistakable. I refer to the growing trend, in country after country, toward requirements imposed on franchisors that can only be characterized as tools of "social engineering."
By that I mean efforts by governments to limit the freedom of action of franchisors, designed to achieve certain social or political or economic objectives but which have no particular relationship to franchising.
Most of these steps can be seen as products of a desire to protect certain classes of people, or to preserve certain industries or certain ways of life, or to prevent what is viewed as excessive economic concentration. A few examples that come to mind, all noted during the conference, include these:
Malaysia requires a certain percentage of franchisees or subfranchisees be Bumiputeras, the descendants of native Malays. That’s not designed to protect the franchisees, but to support a class of society.
Indonesia requires 80 percent of the sources of goods and services that a franchisor or a franchisee utilizes be from Indonesian sources. Clearly, this is not related to franchising, but to a desire to protect local suppliers.
Another requirement in Indonesia: that franchisors or master franchisees operating in certain industries have no more than a certain number of units. Again, there is no protection of franchisees entailed here, but rather the clear purpose is to require franchisors and master franchisees to distribute the franchises or sub-franchises beyond powerful local interests to small and medium-sized businesses.
The requirement in the South Korean regulations that certain franchisors not grow by more than a certain percentage in a particular year. Again the purpose is not to protect prospective franchisees, but rather to prevent companies from growing to such a size that they drive local competitors out of business.
The provision in South Korean law that certain size franchisors not be built closer than a certain distance to an existing operation. While this may help some existing franchisees avoid competition, the purpose is probably not aimed at protecting franchisees, but to protect an existing small and medium-sized business (and probably native).
The requirement in Tunisian law that, in a very limited number of industries, notably foodservice, franchising only be permitted with government approval. Our understanding is that the preconditions the government will apply include the assurance that prices will not be so low as to drive existing operations out of business, that there is a real need for an additional product and service, etc.
The purpose, in other words, is not to protect prospective franchisees but rather to provide some assurance that the foreign franchisor will not harm those who are already there; and, in particular industries, concerns which are clearly motivated by a desire to protect existing industry (for example, the concern in the "education" field that franchisees or foreign franchisors would intentionally fail an unwarranted number of students, simply to force them to come back and buy the course again).
These and other recent examples raise the question: Why? Clearly it is not due to any hostility to franchising. Indeed, in many of these countries, the government professes a strong support for franchising.
I would hazard a guess that the mindset that characterizes all of these steps is a sense that franchising has grown, and will continue to do so, and should be harnessed as a tool to achieve certain political or social objectives. That view of the significance of franchising is, I suppose, a kind of back–handed compliment.
Thanks, but we can do without it.
Philip F. Zeidman is a senior partner in the Washington, D.C. office of DLA Piper. He can be reached at [email protected].
