Franchising: Challenges and Opportunities June 12, 2012
Vietnam Franchises Ltd. About Us Sean T. Ngo, Managing Director Developed, operated Carl s Jr. & other concepts in Vietnam Exclusive partner of EGS for Vietnam and region MBA, University of San Francisco Clients from USA, Singapore, Hong Kong, Japan and Vietnam, including: Manhattan Fish Market, Pacific Coffee Company, Wingstop, Mrs. Fields Cookies, TCBY, Denny s, The Vitamin Shoppe, Rita s Italian Ice, The Melting Pot, and more Edwards Global Services (EGS) EGS Principals: 110+ years of international experience 30 EGS Associates in 25 countries EGS received the 2012 U.S. Presidential Export Award
History of Franchising I.M. Singer & Co 1850 Beginning of 20th Century Motor vehicle industry, soft drink bottlers 1930s midst of depression Howard Johnson (25 Howard Johnson roadside stands) 1940s and 50s Holiday Inns, Sheraton, McDonalds, Burger King, Kentucky Fried Chicken, etc.
What is Franchising A franchise exists only when 1. You permit someone to use your name; 2. You permit someone to use your system of operation or marketing programme; 3. You receive a payment of a fee, lump sum or on-going fee Franchising can be business format, product, process or manufacturing
Benefits to Franchisors Increase brand value Rapid growth Low capital requirements (investments in new outlets & staff) Royalties and other fees More control of brand, system, quality than other growth methods (distribution, licensing)
Disadvantages to Franchisors Reduced control Profit sharing Greater commitment to operating support Problem franchisees
Advantages to Franchisees Relatively quick start-up time Proven system or business model Training, management system available Reliable supply lines, economies of scale Name recognition & goodwill Assistance, guidance from franchisor Benefit from franchisor s improvements
Disadvantages to Franchisees Can be expensive Franchise fee Royalties Advertising Training Supplies Supply chain requirements Reputational risk (both parties) Lack of total control (both parties)
In the US The Average Franchisee Owns 1 outlet Has been in business for 3 years Spends 8.5% of sales on promotions Has US$58,000 in after-tax profit Has made average investment of US$155,000 The Average Franchisor Owns 13% of total system outlets Franchises 87% of total system outlets Has 75% of franchisees own 1 outlet
Internationally The Average Franchisee Has exclusive rights to develop the area or region (e.g. Vietnam, Singapore, Thailand, Southern China) Franchisees own and develop multiple units Franchisees tend to have successful business track record Franchisees tend to be more corporate entities than individuals
International Franchising Countries No of Franchisors No of Franchisees Annual Sales (Billions US$) No of Jobs Singapore 350 2,300 n.a. n.a. Australia 708 52,000 46.7 700,000 China 1,900 87,000 2.9 110,000 Germany 810 3,900 22.3 330,000 Hong Kong 90 2,320 n.a. n.a. Indonesia 261 2,000 n.a. n.a. Japan 1,000 200,000 145.0 n.a. Korea (South) 1,300 100,000 0.840 500,000 Malaysia 187 6,000 5.0 80,000 Philippines 700 4,000 1.7 100,000 Thailand 150 n.a. n.a. n.a. United States 1,400 350,000 1,000.0 9,000,000
Singapore Franchise Fees (2005) Franchise Business Start-Up Costs (With Franchise Fee) Franchise Fee Royalty (% of sales) Advertising Term (yrs) AIR Division Burger King Calfarme Designer Furniture Fast Food Restaurant Washroom Hygiene System S$70,000 S$20,000 2.5% NA NA US$290,000 US$50,000 4.5% NA 20 NA S$40,000 12% NA 10 Cool Station Bubble Tea S$85,000 NA NIL NA 2 Dennis Wee Realty Real Estate Agency NA S$10,000 / S$15,000 4% / 3% NA 2 / 3 EzyShop- AnyWhere Fish & Co Online Convenience store Fish & Seafood Restaurant S$168,000 S$40,000 5% NA 5 NA S$100,000 4% 0.5% 10
Singapore Franchise Fees (2005) Franchise Business Start-Up Costs (With Franchise Fee) Franchise Fee Royalty (% of sales) Advertising Term (yrs) GNC Hilton Hotels & Resorts House of Sudanese Food It s Just Lunch KFC Vitamin & Nutritional Store Upscale Hotels & Resorts Indonesian Restaurant Dating Service Fast Food Chicken Restaurant US$133,000 US$40,000 6% NA 10 US$33,000,000 US$85,000 5% NA 10 S$350,000 S$50,000 4% NA 3 US$86,000 US$25,000 9% NA 10 US$300,000 US$25,000 4% NA 20 Kumon Centre Math & Reading School US$10,000 US$1,000 US$30 / Student / Month NA 2
Singapore Franchise Fees (2005) Franchise Business Start-Up Costs (With Franchise Fee) Franchise Fee Royalty (% of sales) Advertisin g Term (years ) McDonald s Fast Food Restaurant US$280,000 US$45,000 12.5% NA 20 Pasta Fresca Pasta Restaurant NA US$30,000 5% US$10,000 5 Quickly Bubble Tea S$105,000 S$25,000 5% NA 2 SHINES Education Language / Education School US$100,000 US$50,000 10% NA 5 Siam Kitchen Thai Restaurant S$350,000 S$120,000 5% 3% 7 STAR Bookstore Chinese Rental Bookstore S$70,000 S$10,000 S$100 / Month NA 3 Subway 7-Eleven Sandwich Restaurant 24-Hr Convenience Store US$100,000 US$10,000 8% 3.5% 20 S$140,000 Varies Varies NA 15
Key Statistics - Franchisors Average Range Present outlets owned 26.4 % 0 88.1 % Percent outlets franchised 74.25 % 12.1 100 % Franchise fee $ 28,559 $ 5,000 $ 122,500 Royalty rate 5.58 % 2 12 % Advertising fee 3.48 % 0 15 % Term of contract 13.79 years 5 20 years Total number of outlets 2,652 104 13,604 Source: Spinelli et al 2004
Economic Impact Source: IFA
Economic Impact Source: IFA
Retail & Franchising in Vietnam In 2006, Government issued Decree No. 35/2006/ND-CP, specifically aimed at regulating franchising in Vietnam Franchising growth rate of 30%, 530+ franchising shops, well suited to Vietnamese, who are traditionally entrepreneurial Many franchise operations are in F&B, but has potential in other sectors According to latest government figures, there are only 70+ franchise systems in Vietnam Franchising is developing in coming years in food & beverage, education, healthcare, services, and retail fashion
GDP per Capita (USD) GDP per capita growth rate one of the best in Asia
VN has surpassed Indonesia and will surpass Philippines in 5 years National Purchasing Power Parity Though higher inflation recently is evident
Declared Monthly Household Income BUT other assets are substantial 12-15% of total population is affluent, while 5% are as affluent as the West
Urban Declared Income BUT other assets are substantial Market for luxury goods & services estimated between 4-15% of urban households or 1M 4M urban consumers
Aging Population Pyramid
Famous Brands in Vietnam soon
Golden Opportunity 70
Franchisor Franchisee The franchisor and the franchisee knowingly and voluntarily enter into a long term interdependent relationship, each depending on the other for its success (Spinelli et al 155) Relationship
Transactions Analysis Franchisor: Centralized economies of scale 1. Established site acquisition criteria. 2. Design building blueprint specification. 3. National contracts for inventory and equipment specification and purchasing. 4. Centralized training of franchisee management. 5. Detailed marketing plan template for radio, print media, and television promotions. Franchisee: Local entrepreneurial intensity 1. Locate site that fits criteria. 2. Initiate local contractor bidding. 3. Onsite installation of equipment and inventory management. 4. Onsite training of franchise employees. 5. Placement of promotions in local media
Franchising in Emerging Markets Know your target market, disposable income trends, demographic trends, market patterns Franchising is potentially more financially attractive than franchisor s home market But real challenges
Key Challenges for Franchisors 2007 Entrepreneur Magazine Survey Good people skills Coachable Sufficient capital Adequate supply chain Affordable real estate Strong commercial law IP protection and enforcement
India's Hari Puttar In 2008, a court in Delhi rejected a lawsuit filed by Warner Bros against the makers of a Bollywood film Hari Puttar In 2007, an Indian court allowed West Bengal group to create a copy of Hogwarts School of Witchcraft & Wizardry, rejecting a petition from author J.K. Rowling
Yunghe Yunghe is a Taiwanese franchisor of soybean milk with nearly 400 units In 2009, Yunghe received news that its trademark had been preemptively registered in Hong Kong by a mainland Chinese Yunghe won back its trademark rights to the Yunghe name in Hong Kong.
As reported on CBS News in 2011 in Beijing Owner changed name to UFO for fear KFC would sue Shortly after local authorities forced owner to remove logo completely KFC China?
Starbucks Vietnam? Before After
Q & A
Vietnam Franchises Ltd. 4 th Floor, 71-73-75 Hai Ba Trung District 1, HCMC, Vietnam Mr. Sean T. Ngo: +84 909.198.501 Ms. Phuong Kim Hoang: +84 903.446.568 e: sean@vietnamfranchises.com e: phuonghoang@vietnamfranchises.com