Research findings
The primary research revealed many factors which have motivated the case companies to pursue their international retail activity through the franchise route. The motivating factors which emerged from the qualitative data can be classified as organisational and environmental factors. These motivating factors are outlined in the following section and are supported with small vignettes from the respondents.
Organisational factors:
International retailing experience:
The importance of experience as an international retailer in international markets and experience of the use of alternative entry modes prior to committing to franchising emerged very strongly from the case study findings as an important motivating factor for choosing franchising. While both Companies A and E initially became international retail franchisors due to opportunistic approaches from prospective partners, the other four companies had all experimented with a variety of methods of market entry during their history as international retailers.
Company B has operated owned stores in the US and Europe since 1950s, but their internationalization strategy is now dominated by franchising. Two key factors are responsible for this. Firstly, in the early-mid 1980s Company B converted its existing general wholesale exporting business in the Middle East to a more formalized, controlled business by converting it to franchising. The second strategic move occurred in the early 1990s when, as a result of the firm carrying out a strategic review of its international business, it formalised its international operations into a predominantly international retail franchise driven business. As the head of the international division comments:
—-we looked at the business which was still a very scattergun approach and we looked at it to try to formalise it . . . and a form of franchising was developed.
A similar pattern is evident in the case of Company C which has also experimented with a variety of entry modes such as acquisition, joint ventures, franchising and organic growth during its international retailing history. Franchising became a part of the retailer’s international strategy in the early 1980s when, as a result of a review of its export business which comprised of about 90 accounts worldwide, the company “weeded out most of the smaller ones and converted the big, more serious ones to franchising”. In terms of its diverse entry mode experience, Company C also operated a network of owned stores in Canada, the US and Europe but over the past decade it has been involved in a process of disposing of all of them, the owned store route proving too costly. As the head of the international franchise group notes:
—- tested in the fires of adversity we are now a little bit clearer about why we want to franchise.
While the subsidiary businesses had become loss making, the franchising business has always been profitable and as the firm moves forward internationally, it will do so on a franchising basis.
Company D has also employed various entry methods during its international retail history including a large owned store business with one brand in Germany and another in Holland, as well as franchises and concessions in Europe and the Middle East. Like Company B above, in the mid-1990s it had evolved to a point in its international development whereby a strategic review took place. Many owned stores in Europe were closed due to lack of profitability and it was decided that as the firm goes forward its internationalization strategy would be carried out “on a more consistent basis and through the franchise route”. The international retail experience of Company F is also chequered with a variety of entry methods being employed. A period of restructuring during the recession at the beginning of 1990s, saw the company take the strategic decision to focus on the UK as opposed to the international market. However, the company had seven-year contracts with some franchise partners in Spain which they could not break. As the decade progressed they were approached by a prospective Middle Eastern franchise partner in 1997 which re-ignited their interest in international retailing. Like Company D, apart from a licensing arrangement in South Africa which was entered into due to high import duties, the retailer’s internationalization strategy is now firmly based, where possible, on entering markets through the franchise route.
Company evolution and the temporal nature of international retailing are highlighted here. Additionally, these findings add weight to those of Petersen and Welch (2000) with regard to changing from other entry modes to franchising over time.
Availability of financial resources: While many of the case companies have employed a variety of entry modes in the past, all have evolved to the point whereby franchising is the main method through which they will internationalise their businesses in the foreseeable future. Partly as a result of their negative financial experiences with alternative entry modes, along with the competitive nature of the UK fashion retail market which demands considerable financial resources, the attractive financial implications of employing franchising loom large for the case companies. These fashion retailers are motivated to employ franchising in international markets as it offers them international expansion potential with limited financial commitment and exposure.
As the head of international franchising for Company C highlights:
….there is one big factor that makes us want to franchise and that is you don’t tie up the capital – we tie up someone else’s capital.
The business development director for Company D also insists that they do not want to be investing any capital overseas and as such franchising offers the company a successful method of international expansion without having “the responsibility of managing lots of assets in different territories”. Responses from Company F concur with this point of view, highlighting the very competitive nature of the UK fashion retail market. The firm’s commercial director for international operations comments that:
We spend �80-100 million on our UK stores. We invest the capital that is available to us into the UK business. We couldn’t afford to invest that money internationally or take it away from the UK.
As a result of the competitive nature of fashion retailing in the domestic market, internationalization through franchising is particularly attractive financially for Company F.
For all the case companies, the financial advantages of franchising whereby the franchisee bares the majority of the financial burden for the overseas venture has proven to be particularly motivational in the decision to choose franchising as their dominant method of international expansion.
Presence of a franchise able retail brand:
One of the major factors which have motivated these fashion retailers to franchise successfully internationally is the presence of a strong retail brand or brands which are attractive to franchise partners.
Retailers with strong retail brand offers should find them much easier to replicate and, therefore, franchise compared to companies which possess weaker brand offerings.
The importance of the brand to successful international retail franchising is emphasised by the head of international franchising in Company C:
Basically the whole thing about being a franchise is the fact that you have a brand to sell.
I think it is about leveraging that brand at minimum cost of capital to the company at the same time so as not to damage the brand.
Moore (2000) categorises international fashion retailers into product specialist fashion retailers, fashion designer retailers, general merchandise retailers and general fashion retailers. The companies employed in this study fall into the latter two categories.
Companies A and C are general merchandise retailers and the remaining four companies are general fashion retailers. In terms of how well defined the case companies retail brand offers are, all four general fashion retailers possess well defined brands in the domestic market. Interestingly, however, during the period of the empirical study the retail brand offers of both the general merchandise retailers had become much less defined in the domestic market.
Concerning the positioning of the brands in the market, Companies A, C, D and F all operate middle market high street fashion brands and want to be placed internationally where the centres of population are so that they can generate a critical masswith regard to a store network. Company F’s brand credibility is fundamental to the business and is the “complete non-negotiable part of the deal”. CompanyA’s brand, on the other hand, ismuch less defined and within its international franchise division there is the acknowledgement that they “don’t really know whatwe want the brand to be overseas . . . I don’t think, at the moment, our brand is particularly strong enough to advertise for partners”.
While Company C has also encountered problems with its staid brand in the domestic market this situation, however, had become a challenge for the international franchise business some years before as they were ‘competing with the Zaras and Mangos of this world’ in international markets long before they entered the UK market.
The response of the international franchise business was to make changes to the retail brand offer in terms of store design and global marketing and advertising in order to remain profitable and attractive to franchisees.
Companies B and E, on the other hand, both operate at the premium end of fashion retailing, but they are not fashion designers. Company E with its limited international presence recognises the importance of the brand to its ability to franchise internationally, particularly since its international franchise ventures arose from opportunistic approaches from what one informant calls “fans of the brand”. In the case of Company B, which sees itself as an international retail brand and not just a UK-based retailer with international operations, “the brand is the most universally important thing . . . The international power of the brand, that is the key”.
Notably, those firms that have franchised their brand successfully abroad, all emphasised that control of the brand is crucial to international franchising success. Therefore, the third organisational factor which motivates the case company fashion retailers to operate internationally through franchising is the possession of a defined retail brand offer.
Company restructuring:
Company restructuring and retrenchment is also evident from the case study data as influencing the move to franchising among these case firms. Companies A, B, D, and F all went through some form of strategic review in the early-mid 1990s, the results of which saw Company A move from product franchising to business format franchising, Companies B and D focusing their internationalization strategies on franchising and away from owned store businesses and Company F withdrawing from international operations to focus on the domestic UK market. The latter firm, however, could not withdraw from the international arena entirely as it had seven-year contracts with several franchise partners and could not break the contracts.
However, it was not until it was approached by a prospective partner in 1997 that it contemplated further internationalization. For Company C, its strategic review in 2000-2001 came much later than the other case firms. Owing to predominantly domestic competitive pressures, all overseas owned stores were sold with the firm realising that, going forward, franchising is the best way for it to retail internationally.
What is clear from this point is that the retail sector, and fashion retailing in particular, is dynamic and constantly evolving with strategy emerging over time. It is also clear that the factors motivating the case firms to choose franchising as an entry method in international markets cannot be viewed in isolation. Within the explanation of the impact of company restructuring us also encounter international retail experience and competitive domestic pressures which further emphasises the dynamic nature of strategy formation and evolution.
Influence of key managers:
The fifth and final organisational factor to emerge from the case study data as motivating fashion retailers to employ franchising to enter international markets is the influence of key managers. The key managers responsible for the international franchise operations of the case firms are all very driven very experienced people who have very definite views on why franchising is the best method to internationalize their businesses. While a combination of all the other motivating factors highlighted in this paper has led these individuals to these conclusions on franchising, the importance of their influence on maintaining and driving international franchise strategy should not be underestimated. Many managers were appointed around the times of strategic rethinks within the firms at the beginning and the mid-1990s, the results of which saw firms moving away from multi-modal methods of market entry to focusing on franchising as their dominant market entry method going forward. This finding corroborates previous international retail franchise research by Quinn (1998b) who also found that key decision makers within the natural cosmetics company he investigated were favourably disposed towards internationalization before the opportunistic approach from a third party occurred which resulted in the firm’s first overseas franchise store. The following section now focuses on the external environmental factors which motivate the international fashion retailers in this study to employ franchising as their main method of entering international markets.
External environmental factors
Opportunistic approaches. Apart from Company E, all of the case study firms have evolved to a point in their international development whereby they have become strategic international franchisors. Notably, however, this was not always the case as Company A also began franchising and Company F re-entered the international arena both as a result of opportunistic approaches by prospective partners. In terms of partner choice Company A was very haphazard in its approach:
I don’t think we thought very carefully because the strategy then was if he has a big bag of money we will go with him, if he has a medium sized bag of money we might go with him but if he has a small bag of money we won’t go with him. In that way we grew the business to about 35 stores until the mid-1990s . . .
Eventually the company realised that, such opportunism was only sustainable in the short-term. They employed a business development manager which resulted in a more strategic, business format franchising approach as opposed to product franchising approach to their international franchise business. Nonetheless, the initial motivating factor for Companies A and E was an opportunistic approach from a franchise partner.
Company E remains reactive to opportunistic approaches. With a very well-defined brand offer, the firm finds that: . . . the people who approach us and want a franchise have been fans of the brand for a long time, so they have always been [Company E’s] customers and they want to take it to their country.
Case companies B, C and D would see themselves much more as strategic than reactive franchisors. However, as with Companies A and F this is a position to which they have evolved in their international franchise development. As with the other case companies they are approached by prospective franchise partners on an ongoing basis and from time to time would respond but their international country and partner choice process is predominantly strategic in nature. Company B’s director of international operations confirms this view saying that:
We would have a relative amount [of opportunistic approaches] in relation to the brand. If the brand is hot then you will get lots of people and vice versa . . . There is some opportunistic activity but I would say we are more proactive.
Company D’s business development director intimates the same theme:
I would say we are proactive where we want to be but we don’t say no to people who approach us with commercial opportunities.
As such, the case firms exhibit one of the key motivating factors evident from the general international franchising literature but until now has not been explored in any detail in relation to the retail sector, that is opportunistic approaches from third parties prove to be central to the decision to franchise internationally. This will be explored later in the discussion section.
Local market complexities
For Company D, the reality of the complexity of the international retail marketplace which has been gained through experience of international operations has been one of the major factors that has motivated the firm to internationalize through franchising and move away from owned store or organic routes. By employing franchising the company can benefit from franchisees’ knowledge of local market conditions. The major lesson Company D learned from its experience of owning overseas stores is that they “don’t understand the local market properly because we are based in London not Amsterdam or Madrid”. This has led them to the conclusion that:
We don’t understand the property laws. Getting on top of UK laws is difficult enough never mind overseas ones. Store dynamics are different in different countries . . . Your mindset is not right to operate in those markets on your own.
The franchisor brings its brand(s) and retail experience to the franchise relationship and the franchisee brings, among other things, finance and local market knowledge. As the same respondent comments:
. . . the marriage of our brand experience and our knowledge of how those brands operate with the franchisee’s local market knowledge is the perfect way to capitalise on our brands overseas.
This view is also borne out by the vast majority of other case companies. While the financial advantages remain the over-ridingly important factor influencing Company A to franchise, they are also acutely aware of the complexities of operating internationally; commenting that franchising is “basically a set of complementary skills”. For Company B, the local market complexity issues are fundamental to the advantages it finds in franchising:
. . . The advantage of doing business through franchising is that we are finding somebody local in a country where we do not operate and where . . . we do not want to make any financial or personnel commitments . . . They will give you expertise in local issues, language and so on in countries where it would be difficult for you to operate yourself . . .
As Company F’s commercial director for international operations also comments “we never profess to be retail experts outside the UK, which is why we always look for
a partner”.
Domestic competitive pressures:
Given the highly competitive nature of the UK retail market and the fashion sector in particular, it is not surprising that case companies also highlighted domestic competitive pressures as a factor which influenced their choice of franchising in international markets. To an extent Company A’s move to business format franchising was a direct response to the impact the firm’s lack of control of its brand in international markets was having on its domestic operation.
Company F acknowledges that its large domestic network of stores requires constant investment to keep it competitive, spending �80-100 million on domestic store maintenance and upgrades annually. Employing franchising, therefore, allows the firm to remain competitive domestically and also build an international network of stores.
The same is the case for Company D whose business development director believes that, as a result of the competitive nature of the UK fashion market, the firm should not be spending any money overseas. Consequently, this has a very motivational influence on the decision to employ franchising in international markets. As highlighted earlier in this paper, Company C had a very substantial international network of owned stores until this was disposed of in 2001. While the pressures of public ownership and the appointment of a new chief executive can be identified as reasons for the sell-off and the retailer’s subsequent dependence on international retail franchising, arguably the biggest factor was the firm’s poor domestic situation.
A related point here is the impact the UK stock market has on these retailers’ performance and choice of entry mode. Companies A, B, C, D and F are all public limited companies and as such are under pressure to produce returns for shareholders.
The UK stockmarket is notoriously short-termist and, as many UK retailers found throughout 1980s and 1990s, securing returns on owned store businesses overseas, whether that be through organic growth or acquisition, takes considerable time. Therefore, it is highly likely that boards of directors and the stock market have become very risk averse towards owned store internationalization and would much prefer to see UK retailers internationalising through a financially attractive and relatively risk free method such as franchising.
Availability of potential franchise partners:
The final factor deemed to have a motivational impact on the choice of franchising by these fashion retailers is the availability of suitable franchise partners. All the other factors highlighted make franchising a very attractive method of international operation but, without suitable available franchise partners, entering a market will not take place. Some of these firms have found this to be the case particularly in Eastern Europe following the fall of the communist regime. Given the lack of retail expertise and infrastructure in these post-communist countries as a result of the state centralised retail system, when firms tried to enter the market through franchising in many cases they discovered that finding a suitable partner was very difficult. For example, Company F was very keen to enter Poland in the late 1990s but could not find a partner. Eventually they received an enquiry through the internet and took the risk with that partner and opened up a store. On the basis of that opportunistic approach Company F now operates a successful network of stores in Poland. Therefore, while all the other factors may be in place, the reality of the marketplace and its impact on the availability of franchise partners may make entering through franchising difficult.
Discussion of findings
Aspects of certain studies from the international retail franchise domain such as Quinn
(1998b) and Petersen and Welch (2000) offer some insights into why retailers franchise internationally. Quinn (1998b) notes that it is possible that a retailer will use non-franchising modes during initial or early stages of internationalization and only later employ franchising when the brand name and concept has been developed. This is also borne out in the Petersen and Welch (2000) study with one of the fashion retailers in their study, In Wear, employing exporting and owned stores before embarking on a franchise strategy in international markets. This company also indicates that it expects to emphasise franchising more strongly in the future as its retail base, brands and knowledge of international retail operations in foreign markets become more firmly established (Petersen and Welch, 2000). Interestingly, the other fashion retailer in the Petersen and Welch (2000) study, Carli Gry, also entered international markets through the owned store route in 1985 before it opened its first international franchise store in 1994. Petersen and Welch (2000) acknowledge that it is difficult to generalise about reasons for the adoption of franchising. Often, they contend:
. . . in cases where international franchising use has been preceded by other forms of international experience and networks there is likely to be a background of relevant international experience and networks upon which to draw, even though franchising represents a new area of activity (Petersen and Welch, 2000, p. 481).
Such findings are similar to those found in the cases of Companies B, C, D and F which all employed a variety of entry modes earlier in their internationalization history before reaching a point where the retail brand offer was suitably developed to be franchisable.
Only Company A with its general merchandise fashion business is the exception to this as it began franchising without a well-defined brand before eventually evolving to business format franchising. Company E has also not employed other methods of entry into international markets other than franchising but it could be argued that unlike the other case companies it did not begin internationalization until it had already developed a well-defined retail brand offer in the domestic market. Moreover, it could also be argued that as a privately owned company it is under less pressure to increase shareholder wealth through internationalization than the other case companies.
Petersen and Welch’s (2000) conclusions are also supported by the decisions of Companies B and C to convert existing wholesaling/exporting businesses to franchise operations. Quinn (1998b) notes that while the international franchise literature suggests that a domestic franchise base is essential to the successful development of international franchising there are cases where companies use franchising internationally regardless of the home market situation. The case companies involved in this study confirm his observations with none franchising domestically.
The broader international franchising literature provides two conceptual frameworks which analyse the motivations for the international franchise decision (Welch, 1990; Eroglu, 1992). Some fundamental points need to be reiterated at this juncture which differentiate the research presented in this paper from that reported in these two studies.
Firstly, both Welch (1990) and Eroglu (1992) examine why a domestic franchisor would take the decision to internationalise its already operational franchise business.The current research notably revealed factors that influence international fashion retailers to internationalise through the franchise route, however, none of the case companies franchise domestically with all the case firms operating in the UKmarket through owned stores and concessions. A further difference is that the current research refers to internationalization from the UK, whereas Australia is the market of origin in Welch’s (1990) study and theUS the domesticmarket in Eroglu’s (1992) contribution.Moreover, the current work refers to international retailers only, whereas both Welch and Eroglu’s studies are not sector specific. Nonetheless, it is felt that comparing the findings of the current work to that of Welch (1990) and Eroglu (1992) can be insightful. Welch (1990) identifies two factors that directly influence the international franchise decision, that is, fortuitous franchisee interest and domestic saturation. Both these issues were also identified in the current work as influencing the international retail franchise decision though they are termed “opportunistic approaches” and “domestic competitive pressures” in the discussion above. Welch (1989) also found that in the case of Australian franchisors, the approach by an interested foreign party was the most important catalyst mentioned in starting the move to international operations.
As in the findings presented here, Welch (1990) also finds that in most cases international entry through franchising develops over time as a result of a combination of factors. He notes that experience of franchising influences the decision to internationalise whereas experience in international retailing influenced the case companies in the current study. As in the case of the current work, Welch (1990) also found that the possession of a unique concept to franchise also influenced the internationalization decision.
Eroglu’s (1992) conceptual model of the determinants of franchise internationalization has many similarities with the findings of the current work. He also delineates the influencing factors into organisational and environmental factors with operating experience and influence of topmanagement being the organisational factors he identifies which are also found in the case of the fashion retailers in the current work. Domestic competitive pressures, as highlighted byWelch (1990) andHoffman and Preble (1993), are also found in Eroglu’s study to influence the decision to internationalise a franchising system. Therefore, while some similarities are found between the current work’s findings and the general international franchising literature, there are also differences in influencing factors. This is likely to be as a result of the fact that the current work reveals factors that influence retail firms which do not franchise domestically to do so internationally, whereas previous international franchising research investigates why an existing domestic franchise business would be internationalised. Also, the current findings refer to the retailing sector only, whereas these previous studies are not sector specific.
In terms of theoretical development, resource allocation theory and agency theory are the two most commonly employed explanations for franchising in domestic markets (Oxenfeldt and Kelly, 1969; Ozanne and Hunt, 1971; Caves and Murphy, 1976; Rubin, 1978; Mathewson and Winter, 1985; Brickley and Dark, 1987). The theoretical development of international franchising is much less advanced with only agency theory being offered to date as a possible explanation for international retail franchising (Doherty, 1999; Doherty and Quinn, 1999). Certainly the current study’s indings with regard to the importance of local market complexity in choosing franchising as a method of market entry further highlights the importance of information asymmetry in the agency relationship as emphasised by Doherty (1999) and Doherty and Quinn (1999). However, while resource allocation theory has not been applied in any depth to the internationalization of retail franchising current findings relating to the availability of financial resources as a motivating factor for choosing franchising as an international entry method would suggest that there is potential for the application of the resource scarcity argument in this context. Future research should aim to build on these findings and bring the application of this theoretical material further than the current work permits.
Conclusions and directions for future research
In conclusion, this paper has investigated the factors that motivate UK-based international retail firms to franchise their operations in international markets. Given the lack of research on this topic hitherto, and the ability of qualitative research to develop understanding of under-researched phenomena, a case study design was employed and the study framed within an interpretive research paradigm. Through such qualitative enquiry a range of both organisational and environmental factors is found to motivate the choice of franchising as the main international entry method for these fashion retailers. Some companies such as A and E were initially motivated to franchise as a result of an opportunistic approach from a prospective partner, mirroring findings from the mainstream international franchising literature (Abell, 1991). For the other four case companies, having employed a variety of entry modes during their history as international fashion retailers, basing their internationalization strategy on the franchising mode of operations is a point in their individual company development to which they have all evolved. The financial advantages of franchising as opposed to other methods of internationalization are shown to be significant in their decision. Costly owned store operations which failed (Companies C, D and F) not only impacted on these companies themselves but also acted as a warning to other case companies. Experience of retailing in the international environment, therefore, motivated firms to base their internationalization strategy on the franchise mode of operation as they move forward.
Many of the case companies, apart from Company E, were involved in strategic reviews and restructuring during the early and mid-1990s and out of these reviews franchising emerged as the entry mode of choice. Two factors are at play here, firstly the recession in the UK which hit the retail sector hard and, secondly, and probably more relevantly, all of the case firms had been active in the international arena for a reasonable period of time and a review of strategy at this time was simply a point of company development and evolution. Crucially, for the case companies, the presence of a franchisable brand makes business format franchising a reality in international markets. The control and support of this brand is an area of research which requires further development in the literature. Finally, because all the case companies are experienced retailers they are very aware of the complexities of operating in international markets. Franchising offers a practical way of overcoming these complexities.
In summary, both organisational and environmental factors are found to motivate international fashion retailers to employ franchising as a means of international expansion.
The current work contributes to previous research in a variety of ways. Firstly, by employing a qualitative methodology the in-depth findings presented here add to the growing body of qualitative research on international retailing (Moore et al., 2004), international retail franchising (Quinn, 1999; Sparks, 2000) and international services franchising (Altiney, 2004). A key outcome of this qualitative work is that it highlights the evolutionary and dynamic nature of international retailing. While the paper elucidates factors that motivate retailers to franchise internationally, it is clear that the emergence of franchising has occurred over time as a result of the combination of these factors. The current research also supports earlier work by Dawson (1994) which claimed that internationalization through franchising was particularly suited to fashion retailers. Given the numbers of retailers internationalizing through franchising (Retail Intelligence, 2001) investigating the factors which motivate them to enter foreign markets using this method is fundamental to future research in this area.
The paper contributes to international management research by highlighting the importance of understanding the motivating factors which influence one significant economic sector to choose franchising in international markets. Understanding these issues provides insights into how managers approach the internationalization process and entry method choice decision process. Such understanding is valuable to both international managers and international management research given the influence choosing the most appropriate entry method has on the success of an international venture.
In terms of future research, investigating the management of franchise systems by international retail firms is very much worthy of future research consideration.
Research into the implementation and subsequent operation of international retail franchising investigating issues such as control, support and the partner selection process amongst others should be actively encouraged. Further, in-depth research these strategic and operational issues would not only inform the academic development of international franchising for the retail service sector but would also provide practical insights for retailers considering moving into international markets through the franchising mode of operation. While retail specific, such research would also provide insights for the service sector in general, the specifics of which have only tentatively been addressed in the international franchise literature.