I wanted to start a series of articles on business in the developing world, specifically focused on the “New Middle Class” i.e. those making between $2,000 and $10,000 USD per year.
This topic is not totally new, but it is or should be the focus of those businesses seeking to get a new piece of the pie in the developing world. Admittedly, this new model is often difficult to understand, and not much has been written about it in business case studies. Additionally, the “New Middle” is not much like the “Middle” class that the Western world knows and understands, i.e. the $22,000-$60,000 USD of the developed world.
As businesses of all stripes seek to come to terms with ways to do business beyond the BRICs, I hope this series of articles will offer a little ‘on the ground’ insight into these often mentioned, but rarely understood, markets.
Food and Beverage and Fast-Moving Consumer Goods (F&B and FMCG, respectively) represent some of the fastest growing and largest markets for western companies in the ‘New Middle’. Franchising of western-style concepts makes perfect sense for a growing consumer class with (some) money to burn.
However, the ‘New Middle’ while respecting the value, quality and taste of western-style franchises, also are looking for something more and different for their money. Simply put, they have different tastes for the same items.
While advising a group of western franchises lately, I came upon a series of five principles that created disharmony between the expectations of the western Franchisors and the potential developing country buyers. Understanding and accepting these five principles will greatly increase the success and ability of western-style concepts in the developing world. I will list them here and expand on them below:
THE FIVE PRINCIPLES OF FRANCHISING IN THE DEVELOPING WORLD:
(1) You Must Be Willing to Adapt
(2) Set Realistic Sales Targets
(3) Relationships Matter
(4) Money Trumps Experience
(5) If You Don’t Do It Right, Someone Local Will
(1) Adapting to Local Tastes: Developing countries are often unique and tough markets. Because the majority of your consumers will look at your product as something special, not just one alternative amongst many, they will have different expectations. They want value, adaptation and can be very fickle. After all, the purchase of your item is significantly more than many other things that they can buy, so why not expect more? So the key is to be willing to adapt your franchise, your menu and any number of small things that will make a difference. Should you adapt so much that you lose your concept? Of course not. But some adaptation will win you customers in ways you never expected. Here’s a local example. Can you guess what McDonald’s biggest seller in Indonesia is? It’s not burgers and fries, though that is still the chain’s signature offering. It’s fried chicken and rice.
Many western franchises are pretty rigid about their brands and with good reason - they’ve worked hard to get there! But small tweaks and additions to the menu can make the difference between success and failure. Krispy Kreme donuts are an example. They were repeatedly asked by their local franchisor to add new flavors and types of donuts to suit local tastes. Not to remove their signature donuts, but to add variety and additional sales. Krispy Kreme management refused, and sales suffered significantly. Now, their poor showing in the local market has become a cautionary tale to others about what happens when you don’t adapt.
(2) Unrealistic Sales Targets: Many western franchisors do their homework before coming to the developing world, and have certain expectations about sales targets, store targets and charted franchise growth. But the problem is that they’re basing their expectations on a set of figures extrapolated from using matrices in developed markets. The difficult thing about the developing world is that each country is unique. Sometimes maddeningly so. But local franchisees understand the constraints of their market and plan using their own educated figures.
For example - a US franchise may come expecting something in the range of 10 stores within the first 5 years - which from their growth charts seems realistic and based on population, economic growth, etc. But perhaps they didn’t take into account local tastes or income in that market. What if their product was a Latin-fusion grilled item, and the local population was used to fried items. Moreover, the spices, preparation and sides are totally different than the local market. So then the franchisee needs to create a market for the product, and this occurs through introduction of the new flavors through time, trial and error. So the curve is steeper and the store targets might be 5 in 5 years - they might be 2 in five years, but then the concept breaks through and the growth is exponential!
Coming in with targets that don’t fit the local market can often break the conversation before it happens. In this case, it is better for the franchise to submit their targets as a bargaining point, to be negotiated after, not a firm set in the contract. In this way, a conversation is opened and the franchise may be able to better understand why the targets are different and why the expectations are different as well. And it also allows for the negotiation and future success to happen, not closing the door before the conversation starts.
(3) Relationships matter: In the developing world, relationships are key. And in many countries, personal relationships significantly outweigh business benefits, and sometimes, even profit motivation. This is often hard for western businesses to understand. Yes, many of us have been told to build relationships, but it means more than a causal email and a Christmas card. Many western businesses feel that if there is a demand, and the business supplies the demand, then it should be a simple commercial transaction – i.e. I have it, you want it, you buy it from me and we exchange currency. But follow-up and relationship building means sustained contact, pictures of your children, invitations to dinner or lunch, and even reciprocal visits to the US.
While this may seem extreme or even uncomfortable for many in the west, it is the nature of business in the developing world. You may even find your proposed partner buying a different franchise that is less suitable and maybe even costs more than yours from a competitor. How did this happen in the face of common sense and profit motive? The answer is usually relationship. Your competitor had it and you didn’t. Relationships trump sense in a way that confounds many businesspeople, but makes sense elsewhere. But it can be used to your advantage – your relationship will allow you to push out comparable suitors in the future as well and often save your business when times are tough.
(4) Capital rich, experience poor: Many businesses in the developing world are remarkably horizontal – paint, auto parts, boutique finance, magazine publishing and a food franchise under the same roof? It happens more often than you think. This is often hard to fathom for western franchisors that come requesting certain years of experience with the food & beverage business, or running a restaurant, or the like.
More often than not, however, the applicant or interested party will have little to no experience in food or the restaurant business, but will have ample capital, or significant other business interests. This is not unusual. In the developing world, almost everything is needed or will be needed in the future. Good businesspeople are usually the most visionary and able to see what niches need to be filled. For them, a restaurant business is much the same as an auto parts business or even publishing a magazine. Of course, to those specialized in one career and especially for business development managers from Franchise groups who have been working in franchise for their entire lives, this seems totally incompatible. But is it?
In the developing world, the primary means of getting things done is ingenuity and inventiveness, often panache for working within a broken system. So for a business person, all business requires is a need, a customer base, and a means to get the product to those customers. In the franchise model, most of the background work in permits, customs issues, space rental and the like will be undertaken by the franchisee – and these issues could take up to 80% of the time and effort – why not choose someone who has proven hat they can work within the system? Often the next step of running the franchise is taken up by expats with pr3vious experience anyway. In the developing world, if you don’t have the experience, you can buy it. So why not take the chance?
Since the key factor is the relationship anyway, trust your instincts, not the specific experience of the proposed franchisee – he or she won’t be running the day to day operations anyway. Instead, choose a partner that you can trust and build a relationship, rather than one that might look good on paper or fit a model from the US, but with limited ability to succeed in a very specific local environment. This will often be the difference between successes and failure, especially for new concepts.
(5) Local ingenuity: If there is a need for your franchise, you should fill it – or a local company might take your idea and do the same. Many business people in the developing world will create their own local ‘copycat’ franchises if turned down by larger western franchises. These will not be exactly the same, of course, but they will be similar enough that you will see how you could have made it.
Two great examples from Indonesia are the ‘Cheese Cake Factory’ and J.CO. Donuts. In the case of the Cheese Cake Factory , the real Cheesecake Factory turned down the numerous requests of Indonesian business people to open a franchise – so a local businessman decided to open his own. While the menu is different and the logos are not the same, the concept rings a bell with local consumers. If asked if they are affiliated with the Cheesecake Factory in the US, servers will reply, “No, we haven’t opened a branch there yet.” Clever.
J.CO. is a similar company. It was clear that Indonesians wanted and needed more donut and baked goods franchises, but other outlets had declined interest, or hadn’t modified their menu to suit local tastes. So in light of this, local hairdresser and minor celebrity Johnny Andrean created his own line of ‘Hollywood donuts’ to suit local tastes. The chain now has over 100 outlets spread throughout ASEAN. Local taste matters! But so does local talent. So understand that where there is a need, there will be someone to fill it – sooner or later.
I hope these five principles of Franchising in the developing world have given you something to think about as you look to expand globally. The developing world is not an easy place to do business, and hot for the faint hearted or risk averse. However, the ROI is significant if you play for the long haul. And the demographics are telling. Of those billions set to move into the consumer class throughout Asia and Africa, they will be looking for something different that the old middle – they will want value, local taste, and quality. And if we can’t put our companies out front with the right products and service, someone else will.