International

Economic cooperation
Group members:
10186096, 10186048, 10186059, 10186051, 10186036.
 Research outline
1. What is Franchising?
❖ International Franchising - overview
❖ Types of International Franchising
❖ International Franchising Association
❖ Advantages & Disadvantages of International Franchising
2. Case study - Subway
❖ About the Company
❖ Offered Products
❖ Internationality of Subway
❖ Differences in Products Across the Globe
3. Franchising in China
❖ Opportunities & Threats of Franchising in China
❖ Distinct Features of the Chinese Subway
❖ Recommendations for Chinese Subway Franchises
4. Conclusions
 International franchising
Franchising is a system based on the licensing for the right to duplicate a successful business format in foreign
markets.The franchisee pays the franchisor a series of different fees for each service (sales fee, front-end fee,
advertising fee, etc.) Since 2012, about 1,740 brands have tried the franchise model, according to FRANdata, a
company that tracks and advises the industry. Moreover, based on newer research, US local franchises in 2019
alone supported nearly 8.4 million direct jobs, $787.5 billion of economic output for the U.S. economy and
represented 3 percent of the total Gross Domestic Product (GDP).
 Types of international franchising
The 2 most frequently utilized types of international franchising:

1. Master Franchising Agreement: master franchising is one of the most popular international
franchise models, and is considered to be one of the simplest ways to expand a franchise
overseas. Master franchise rights are exclusive to the master franchisee, and they give him rights
to use and distribute the branding, marketing and other operations of the franchise to open
company-owned outlets and appoint franchisees. The master franchisee then grows the
franchise by developing a network of units across the region, a number of which is usually
specified in the master franchise agreement. Most master franchisees are natives of the targeted
country.
2. Direct franchise agreement - the franchisor retains control and licensing of the franchise
completely. In a direct franchising model, the franchisor continues their role in a very similar way
to domestic franchising. This kind of franchising requires a lot of resources and time on the part
of the franchisor, as they will be providing the same level of training, recruitment and support to
franchisees as the franchise expands rapidly and difficulties moving into a new market are
overcome. Direct franchising is usually carried out remotely due to the centralised nature of the
model, and works better in expansion to markets with similar cultures, languages, legal systems
 International Franchising Association (IFA)
Another important aspect concerning franchising is the the International Franchise Association. It works through its government
relations and public policy, media relations and educational programs to protect, enhance and promote franchising. IFA claims to
have more than 12,000 franchisee members and nearly 1,300 franchisors in addition to more than 600 suppliers as dues-paying
members. As they state on their website, “The membership of the International Franchise Association affects local and global
change. We protect and promote franchising by educating lawmakers and the public and fighting for the future of our business
model. IFA is your determined political advocate defending the future of the franchising community. We are dedicated to achieving
the greatest possible benefit for our members and franchising worldwide.”
A few of the IFA’s guiding principles:

● Franchising is a unique business model. It is in the interest of the Franchisor, each Franchisee, the suppliers to the franchise
system, and the consuming public <...>
● It is the goal of every business that each stakeholder be successful, and franchising is no different. Franchisors and
franchisees need to be profitable to be successful. However, as in any business model, Franchising is not immune to the risk
of failure <...>
● Franchisees should clearly understand the franchise business model before investing.
● While not transferring any equity in the Franchisor’s Intellectual Property to the Franchisee, Franchisees should have the
opportunity to monetize any equity they may have developed in their business prior to the termination or expiration of the
franchise agreement.
● Clarity and transparency is essential for establishing and maintaining positive franchise relationships and for the goal of
continuous improvements in the franchising environment.
Advantages of international franchising
● Allows organizations to enter overseas markets, expand their products, and
reach new consumers.
● Presents a lower risk compared with traditional company-owned
expansion.
● Owners don’t have to spend time and money recruiting a full complement
of staff in the area and recollecting current staff or offices to the new area.
● Franchise companies usually provide extensive training and support to
their franchises in effort to help them succeed.
● Easier to take advantage of the new markets that are yet unfamiliar with
your business model.
● Bring substantial profits.
● Although it depends on where one decides to expand, favorable
government regulations could substantially help franchising companies.
● Corporate image and brands are already recognized.
● Consumers are generally more comfortable purchasing items they are
familiar with, working with companies they know and trust.
Disadvantages of international franchising
● Franchises can be costly to implement.
● Franchisors usually require franchisees to follow their operations
manual exactly how it is, in order to ensure consistency.
● Franchisees must be precise at following directions in order to
maintain the image and level of service already established.
● If the franchisor makes poor decisions or some other franchisee
decreases quality and clients are alerted, the brand loses
credibility, which affects the whole brand.
● One of the potential problems of expanding into other countries is
overcoming the cultural barriers. Just because something is
popular in the United States does not necessarily mean that it will
be popular in other countries.
 Case study - subway sandwiches
It’s been discovered in the recent NYT article that since Mr. DeLuca’s (the previous owner) death, the company has been
on shaky footing. First of all, it was slower than many rivals to launch a digital loyalty program and mobile ordering options.
Secondly, the 2019’s revenue was only equal to $10.4 billion, down 9.5 percent from 2015, according to the market
research firm Technomic. Moreover, Subway’s store count has shrunk by more than 2,000 since 2015. What are the
reasons for these seemingly downsloping changes?

Subway parcels its vast network of stores into more than 100 regional fiefs. Each is overseen by a development agent, who
recruits new franchisees, approves buyers for existing stores and sends inspectors — known as field consultants — to
conduct monthly reviews. But usually, development agents are also franchisees themselves. When that is the case, they
are both in charge of and competing with other store operators, and their own locations are inspected by people they hire.
These feel like conflicts of interest to many Subway owners — giving development agents the means and motivation to
shut down competing stores and take over profitable ones by manipulating inspections. Many franchisees who have lost
their restaurants say that they have recouped little of their original investments. Intervention from Subway’s headquarters in
Connecticut is rare. Moreover, Subway’s franchise contract forbids the company from unilaterally closing stores just
because sales are weak. But franchisees can lose control of their restaurants for failing to meet Subway’s operating
standards.

In 2018, Subway initiated the equivalent of 29 litigation actions (mostly arbitrations) per 1,000 franchisees, compared to 1.4
actions for McDonald’s, Dunkin’ Donuts, Pizza Hut, Burger King and Wendy’s combined, according to an analysis of the
companies’ disclosure documents by John Gordon, a restaurant industry expert at Pacific Management Consulting Group.
 About the company
Subway is the largest fast-food company in the world by store count, with more than 24,000 restaurants in the
United States alone. It is owned by Doctor’s Associates Inc. It came to fruition in part due to entrepreneurial
immigrants. Unlike chains such as McDonald’s and Burger King, where many franchises are operated by
investment firms, Subway owners are mostly individuals and families. The company’s co-founder, Fred DeLuca,
made stores easy to open; most new franchisees are charged a $15,000 initial fee, compared to $45,000 at
McDonald’s. In exchange, Subway operators must hand over more revenue than at many other chains — 8
percent of gross sales — while also agreeing to other fees and stipulations. For half a century, the system
worked to mutual advantage. Subway’s value hit $12.3 billion, and countless first-generation Americans
bootstrapped their way to success, one foot-long at a time.
 Offered products
➢ Subway's core product is the submarine sandwich (or "sub"). In addition to these, the chain also sells wraps, salad,
paninis, and baked goods (including cookies, doughnuts, and muffins).
➢ Subway's best-selling sandwich, the B.M.T. (short for "Biggest, Meatiest, Tastiest"), contains pepperoni, salami, and ham.
The name originally stood for Brooklyn Manhattan Transit.
➢ Subway also sells breakfast sandwiches, English muffins, and flatbread.
➢ A 2009 Zagat survey named Subway the best provider of "Healthy Options" (in the "Mega Chain" category).
Subway’s internationality
As of July 2020, Subway had approximately 41,600 locations in 111
countries worldwide, all independently owned. These locations are largely
concentrated in North America, with 24,129 in the United States, 3,155 in
Canada, and 929 in Mexico. The company’s international expansion
remains equally aggressive.

When the company started in Japan, the concept was changed originally
to the point that a Subway customer from North America would walk into a
store and look at the menu and really not know what to order because it
wouldn’t be familiar to them. It was still sandwiches, but the sandwiches
were very much changed from what we had originally intended. They have
since come to understood that what made Subway great was those six-
inch, foot-long sandwiches and basic menu structure. The main idea is
that they had their own version of sandwiches that appeal to the local
taste.

In addition to that, Subway offers store option programs where the store
itself can offer a local sandwich. So if an owner wants to offer something
that he thinks is special, as long as it stays within the ingredients and gets
the thumbs up from the company, they can do so.
 Subway’s internationality cont.
In order to maintain supply chain around the globe, the company approaches economies of scale when
catering in some places like Europe. It is easier to thrive within the European Union where the logistics is so
interconnected and unproblematic to get product from border to border. In those cases, the company can have
one or two distribution sources for a number of countries.

However, not every country is aware of the brand. In one of the interviews, Subway’s director of development,
Don Fertman, even said, “We arrive (to the market) and sometimes they think we have something to do with an
underground train.” In complicated cases like that, the company chooses to import either from another country or
from the United States if they can’t get something locally. Even though it gets a little bit more pricey, this is the
way that Subway management accepts in order to maintain their standards.
 Differences in products across the globe
Some of the unique Subway sandwiches from across the globe include:

● Australia: Wagyu Beef, a lightly seasoned, premium-quality beef patty that's known for its marbled
appearance and served with home-style tomato relish.
● Brazil: Smoked Chicken and Cream Cheese that's similar to chicken salad but made with cream
cheese instead of mayo.
● India: Paneer Tikka, made with marinated cottage cheese slices cooked in a traditional Indian clay
oven.
● Japan: Ice Plant Veggie, which is hydroponically grown at participating restaurants. The ice plant is
known for its crispy and naturally salty-tasting leaves.
● Mexico: Pierna Habanera, a spicy ham served with hot habanero sauce and Mexican-style cream.
● South Africa: Peri Peri Chicken, which is made of chicken strips with an African-inspired sauce and
seasoned with chili peppers.
● Sweden: Skagenrora, a mix of shrimp, crab, mayo, lemon, herbs, and spices.
● Saudi Arabia: Halloumi, a soft white cheese made from sheep and goat milk, which has a high
melting point and is typically grilled or fried.
 Franchising in China
China’s total population is about 1.34 billion, making it the most
populated country in the world, and is growing at about 0.46% Annual Increase in New Franchised Stores in China: 2018-2019
with 47% living in urban areas. According to the IFA’s report on
China, China’s GDP (Purchasing Power Parity) is $12.61 trillion
and is growing at a real rate of 7.8% with an inflation rate of
2.6%. China only ranked 91 out of 185 countries in the World
Bank Group’s Ease of Doing Business Ranking mostly due to
government regulations on business. Western and local
franchise brands have developed significantly in China over the
past 15 years, as the Chinese consumer has become an engine
of economic growth and the country’s business environment
has improved. There is a great deal of potential for further
growth, but now the franchising business only accounts for 3
percent of China’s total retail sales, starkly behind the 30
percent in the United States. Although not big in scale, the
franchise sector has witnessed rocketing success in China. Its
sales growth hit 40% on average in the last several years, far
more than the 10% annual growth of national consumer goods.
It is predicted that the U.S. quick-service restaurant (QSR)
franchises in China remain strong but face increased
competition from Chinese franchises in such categories as
leisure drinks and “ 火锅” restaurants serving takeout meals.
 Opportunities of franchising in China
● The consumer class is expanding fast. The large group of middle- and upper-class consumers can afford to buy more
than basic necessities, and many members want to show their wealth through what they buy.
● Western brands are highly regarded. Many consumers perceive Western brands as providing quality, convenience, and
customer service. This is true especially in the retail and food sectors, where most major food franchises are either already
present or are entering China
● Western franchises bring new and modern business systems. Successful US franchises bring a complete business
system, management processes, job training, and the potential for healthy and reproducible bottom line margins. US
franchises in China thus have high potential to succeed.

Threats of franchising in China

● Intellectual property protection is uneven. Weak intellectual property enforcement and an inadequate legal framework are
key reasons early foreign brands opened as company-owned stores or Joint Ventures, instead of franchises, in China.
● Local managers lack strong management skills. Franchises in China often experience difficulties finding local managers
who understand how to run a business.
● China has many markets. The sheer size of China, and its diversity of business and food culture, makes franchise
development difficult. Companies that function well in one region seldom function elsewhere in China.
● Franchises must adapt their products to new markets. Some franchises face difficulties in China when they do not adapt
—or are slow to adapt—to the needs and tastes of Chinese consumers. For example, restaurants should conduct appropriate
research before planning their menu and offerings. Sales may increase simply by adding chicken dishes and rice to the
menu, or by changing a spice or bread.
 Distinct features of the Chinese Subway
Subway, which entered China in 1995, is specifically seeking second-tier Chinese cities because it has existing foundations in major
cities such as Beijing and Shanghai.
Subway’s unique selling point attributing in healthy concept is considered to coincide with a “healthy dining” trend emerging in China
market, which helps to build a distinctive brand image. To localize the dishes, Chinese managers tried to experiment with Beijing
roast duck sandwiches and sauces like a hot and spicy Sichuan sauce, part of its major campaign to capture a larger share of the
fast-food market in China. What’s more, Subway’s emphasis on fresh eating and lots of vegetables will help the franchise chain grow
as Chinese consumers become more aware of healthier food. Additionally, China is starting to take note of rising obesity in the
nation.

When comparing Chinese Subway menus with
the American ones, we found a few differences:
● Chinese Subway restaurants don’t provide
Ranch dressing,
● The selection of subs in the Chinese
restaurants are not as diverse as in the
US,
● No yogurt, apples, or milk,
● Chinese Subways usually only offer 1 type
of cheese.
In order to adapt the menu to the Chinese
tastes, managers have:
● Changed the size and locations of the
venues: Chinese venues are small stalls
inside malls (compared to the American
drive-thru, for example),
● Provided Chinese Subways with
differently-flavored chips (such as
cucumber and shrimp flavors that
Americans don’t usually eat).
Recommendations for Chinese Subway Franchises
It is vital for Subway to devise a separate marketing strategy for the Chinese market given its idiosyncratic
nature relative to other markets in the West.

We propose segmenting the market through psychographic, demographic, and behavioral measures. More
specifically, Subway should target Chinese people based on these criteria:

● Age 15-45
● White collar worker
● Disposable income above RMB 3,000
● Personal acceptance of western dishes

Using Celebrity endorsements to promote the products might also help in the way that cause emotions and
increase consumption.
It would also be beneficial to incorporate Subway products with local Chinese festivals by leveling consumers
with products (such as KFC’s traditional Chinese New Year campaign).
We also propose that Subway in China needs to position itself as a fast-food chain offering healthy foods and a
unique dining experience. Moreover, the size of the sandwich that is applicable in the US (a foot-long ~ 30.5 cm)
might not be the best localization strategy. Having downsized versions would be a viable approach to meet the
needs of Chinese customers.
➢
Conclusions
Franchising can be one of the most effective ways to amplify business growth. Within the thriving food and beverage
category in the region, it is a model that has proved particularly compelling.
➢ Conducting market research before entering a new market is incredibly important, giving the franchisor greater
confidence that there is a demand for the product or service. Failing to do adequate market research is one of the
biggest mistakes independent entrepreneurs typically make.
➢ The brand equity one’s acquiring is not the only advantage, but logistically there are a lot of benefits that aren’t
available to the entrepreneur starting a business from scratch. Perhaps the most significant is that one gets a proven
system of operation and training in how to use it. New franchisees can avoid a lot of the mistakes startup
entrepreneurs typically make, because the franchisor has already perfected daily operations through trial and error.
This also ensures brand-level quality and consistency internationally; making sure businesses are offering their
customers the same quality service that they’ve received or would receive at locations elsewhere.
➢ Selling to a different audience means you have to consider the appeal of the product to the region’s culture. Local
trends, customs and consumption habits must be taken into account, including everything from halal requirements to
something as personal as taste. Therefore, cultural awareness and cross-cultural communication skills have become
essential for successful new market entry and development. In the context of international franchising strategy and
tactical execution, cultural considerations play a pivotal role in several critical ways that require the appropriate
priority, preparation, and attention to detail. Though doing business in a new market can be testing at times and
requires both care and extensive research and due diligence, the dividends can be great. To grow domestically,
location is crucial, but to grow internationally, the onus is on localization.
Thank you!