Tuesday, November 1, 2011

What's the right way to grow overseas?

Wally Doolin, chairman Of Black Box Intelligence and a recovering chain executive, doesn’t flinch at bringing up the sometimes controversial issue of brand ownership. At last year’s People Report Best Practices Conference, he lobbed the firebomb observation that control of a concept by an investor, like a private-equity company, might prove a troubling change for an industry that was built largely on entrepreneurship. “Usually,” he noted at the time, “enterpreneurs make the decision that’s right for the business.”

At this year’s conference, which started today with a new session on the international market, he touched on a sensitive issue again by asking two U.S. brands what ownership model they’d have preferred to use in their overseas expansion. If they could do it over again, he asked officials of Starbucks and T.G.I. Friday’s, would they do more franchising? Less? How about joint ventures? What do they see as the ideal ownership model when you head abroad?

Nick Shepherd, CEO of Friday’s parent company, said it’s not a matter of what was right or wrong. Friday's chose a particular route because of factors that prevailed at the time. Any U.S. chain looking to grow abroad may have to make compromises because of it's situation, like not having enough capital to blitz a market. That would suggest franchising. But to woo a local partner, and maybe local financiers, a chain might have to hold a stake in the overseas stores. That'd mandate a joint venture.

Joint ventures can work beautifully, he stressed, but it’s important to structure it correctly. Having less than a 50% stake can mean surrendering too much control of the brand to the local operator.

You might have to start with a smaller stake, just to have some skin in the game, but it doesn’t make sense to have 15 or 20 percent because it puts you in a passive position, agreed Shepherd’s fellow presenter, Joe Canterbury.

Canterbury, Starbucks’ VP of international business development, noted that the coffee giant now wholly owns its restaurants in a number of foreign markets, a far cry from the small stake it held when it established its first beachhead, in Japan. But back then it needed to "have some skin in the game" because the brand was untried outside of the United States.

Franchising provides more control, they suggested, but at some point the local operator’s interests are going to diverge from the franchisor’s. Canterbury characterized it as inevitable.

Whatever model is pursued, they agreed, the key is finding the right local partner. The tenor of that relationship will be crucial in good times and in bad. A good partner can get you the sites and people that ensure success, stressed Shepherd. And even when interests diverge, a strong relationship enables you to resolve the situation amicably.

Shepherd noted that everyone in the room has had the experience of picking a franchisee who looked great on paper but failed to meet expectations as a business partner. It happens overseas, too, but what goes wrong in a store in Singapore can spread across the globe in a flash.

Doolin ended the session by asking the pair to recount one of the humorous instances that U.S. chain executives invariably encounter abroad.

Canterbury recalled how Starbucks worked with local authorities to resolve a trademark dispute. During the negotiations, they sat in front of a 20-foot-high portrait of Russian strongman Vladimir Putin, trying not to show the intimidation they felt.

Shepherd recalled a business presentation he co-hosted before his days with Friday's. His boss stressed at the time that they were not to mention an obscure sporting event to the 500-plus Europeans in attendance because it might offend them. Instead, he made a reference to Nazis in jackboots. Then he threw the emcee duties over to Shepherd.

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