International expansion often provides the best opportunity for growth when a brand has saturated the U.S. market, but expanding overseas isn't without its challenges.
— Kristen Hawley
The McDonald’s Golden Arches are a familiar sight in the more than 100 countries where its 36,000-plus fast food restaurants are located.
The chain has spread across the globe with a well-developed network of franchises, a legal agreement whereby a franchisor licenses its intellectual property, trademarks and systems to a franchisee for a fee. But things can get tricky when a company sets its sights overseas, as illustrated by an ongoing dispute between McDonald’s and one of its two franchisees in India, Connaught Plaza Restaurants Pvt. Ltd.
At the end of 2017, half of McDonald’s 169 restaurants in north and east India operated by Connaught closed. Nearly all of the restaurants have since reopened, but the entities have been caught up in a months-long legal battle in which the franchisor began the process of terminating the franchise agreement, according to Quartz India.
The complicated case illustrates the challenges of international franchising.
“It’s [international franchising] similar to issues in the U.S., but aggravated by the long distance, and perhaps the franchisor’s lack of knowledge of the territory,” said Robert Burstein, an attorney and counsel in Wiggin and Dana’s Franchise and Distribution Practice Group. The firm represents McDonald’s in some of its business dealings, but Burstein is not involved with the case in India.
Issues will likely continue to arise because international franchising has emerged as a primary growth vehicle for American fast-food chains.
“At this point, the majority of income for brands like McDonald’s and the component brands of Yum [parent to KFC, Pizza Hut and Taco Bell] come from outside U.S. borders,” said Josh Merin, vice president of international affairs for the International Franchise Association.
For instance, Subway told Skift in an emailed statement that growth outside North America, as a percentage, has been growing exponentially. “It now substantially outpaces our domestic growth, accounting for most of our new business.” Subway has 25,908 U.S. units and 18,004 international locations
Of the 200 largest restaurant franchisors in the U.S., 39 percent of their units are international, Merin said, citing figures from the industry publication Franchise Times. Over the last three years, 74 percent of their collective unit growth came from outside the U.S. And according to IFA member surveys, 80 percent said they already do business internationally or aspire to it.
“If they want to keep growing at scale, they need to leave the U.S.,” he said.
How does it work?
Making the international leap is a significant step, but it comes wrapped up in a dizzyingly complex array of rules and regulations from both the U.S. and the foreign country.
In the U.S., franchising is governed by the Federal Trade Commission, and specifically the FTC Franchise Rule, which was originally enacted in 1979 and updated in 2007. The Franchise Rule governs all aspects of franchising, including the types of relationships covered, exclusions and exemptions, and disclosures. For those doing business internationally, the 2007 update clarified that the FTC would not regulate franchising outside the U.S. However, some states, like New York, claim worldwide jurisdiction, meaning that the state’s laws apply to international franchises, unless an exemption is obtained, according to Burstein.
In addition to these rules, a franchise agreement between franchisor and franchisee outlines the business relationship. But the best rules and agreements don’t guarantee a smooth relationship. The major issues that can arise often deal with terminating the franchise agreement, the development timetable and operational performance in the local country. Ultimately, the best way to head off problems is at the start, with thorough due diligence.
“The best franchise agreements in the world, they’re not going to overcome the relationship issues or whatever local issues are going on,” Burstein said.
If legal issues do arise, court or arbitration proceedings could be held in the foreign country, in the U.S., or in both locations, depending on the situation.
“If it’s going to take some action locally in the foreign country, how receptive are those courts or arbitration tribunals to the foreigner?” Burstein said.
McDonald’s isn’t the only international franchise to make news, either:
- Tim Hortons franchisees have had a rocky road with parent company Restaurant Brands International Inc. Last year, U.S. and Canadian franchisees formed alliances to represent their interests, and Canadian franchisees filed a class-action lawsuit against RBI. The café chain has more than 4,600 units around the world.
- Church’s Chicken, or Texas Chicken, as it’s known internationally, operates in 27 countries and has pushed overseas growth in recent years. While it has more than 1,650 units, it’s still much smaller than a McDonald’s or Subway. Tony Moralejo, executive vice president of international business, has helped move the chain from opportunistic to strategic growth, according to an interview with Franchise Times, since he joined the company in 2013.
- In February, Dunkin’ Brands Group Inc. released a three-year business plan that focuses on value, digital technologies and menu innovation in international markets. Coming next is delivery “in as many markets as possible,” according to a release, following success for franchisees in the Middle East and Asia. The company’s 20,500 Dunkin’ Donuts and Baskin-Robbins units in more than 60 countries are fully franchised.
Skift Table contributor Marcella Veneziale is a journalist and editor based in Zagreb, Croatia. For the past six-plus years, her work has focused on food and the business of restaurants.