- The franchise economy in Middle East and North Africa (MENA) is worth $30 billion and is growing by 27% per annum. High disposable income of consumers, favorable regulations, and a young and upwardly mobile consumer market are the key factors driving growth. GCC nations are at the forefront of growing the franchise economy in the Middle East, while Egypt is the leading franchising destination among African nations.
- Food and beverage (particularly fast food) sector is the biggest beneficiary of the growing franchise economy, while other sectors like education, maintenance and health services, are underdeveloped and are growing slowly.
- International brands looking to expand rapidly into the MENA region usually prefer to opt for the master franchising (also called as sub-franchising or multi franchising) format.
- A strategic entry into the franchise market of the region must also take into account the legal, regulatory, cultural, religious and social norms that define the preferences of the governments and consumers.
- Just Falafel stands out as a success story – adopting the franchising route has this Middle Eastern start-up expand to 18 different countries with more than 900 outlets, increase its sales by 35 times, and become the Biggest Falafel Franchise in the World.
The franchise economy in Middle East and North Africa (MENA) is worth $30 billion and is growing rapidly. As per Middle East and North Africa Franchise Association (MENAFA), the franchise industry in the Middle East and North Africa is worth over $30 billion today, and is growing at a CAGR of around 27% annually. Concentration of high net-worth individuals, favorable regulations, and a young and upwardly mobile consumer market are the key attractions for franchisors looking to expand their operations within the region. On the other hand, the driving factors for franchises and local governments are the entrepreneurial opportunities presented by the franchising model, job creation, and the ability to inject international grade skills and processes into the economy. Further, investors also feel more confident opening a store under the umbrella of a large, multi-national corporation, as they expect franchises to respect the strict quality standards issued by the mother company, and also benefit from the well-established operating, marketing, and accounting practices of the franchisor.
Not surprisingly, GCC nations are at the forefront of growing the franchise economy in the Middle East, while Egypt is the leading franchising destination among African nations. With a combined population of 1.4 billion, a GDP of $1.9 trillion, an affluent customer base and (relatively) business friendly environment, the Gulf Cooperative Council (GCC) – Saudi Arabia, United Arab Emirates, Kuwait, Qatar, Bahrain and Oman – presents the biggest opportunity for existing and potential franchisors and franchisees in MENA.
GCC consumers demand exclusive, superior and high quality product, and therefore are the right target segment for international brands looking to make an inroad into the region via the franchise mode. This is clearly reflected in the fact that in GCC, more than 50% of retail sales are generated from international brands and in the leading malls the retail mix is as much as 80/20 (international brands versus home-grown). As a result, GCC malls tend to host a department store franchisee location, e.g. Saks at Kingdom Mall in Riyadh, Bloomingdale’s at Dubai Mall, or Harvey Nichols at the Mall of the Emirates in Dubai.
Within Africa, the Egyptian franchise sector grew from 25 international brands in 1999 to 360 in 2010 and 430 in 2012, as per the Egyptian Franchise Development Association (EFDA). The biggest drivers of franchising in Egypt have been 1) the knowledge transfer from foreign franchisors (who wish to collaborate with franchises having the requisite local knowledge); and 2) job creation – the franchise sector in the country employees more than 55,000 nationals and this number is expected to grow further in the coming years as franchisors target the upper and upper-middle classes in the country.
Food and beverage (particularly fast food) sector is the biggest beneficiary of the growing franchise economy in MENA. Franchised and licensed business have permeated all sectors including education, transportation and tourism; however, like with the rest of the world, the franchising model has found a natural home in the retail and food and beverage (F&B) sectors. Within the GCC countries, fast food is expected to account for 40% of the franchising market, as eating out in a part of the region’s culture and tourism practices. In addition, the liking for U.S. style casual dining has further helped drive the entry and growth of international fast food joints in the region.
The popular international food franchises in GCC region include Burger King, Popeye, Hard Rock, McDonalds, Hardees, Pizza Hut, Pizza Inn, Fuddruckers, TGI, Chilies, and Wendy’s, while Just Falafel is the leading example of a Middle East-based fast food chain that has expanded rapidly in the region and worldwide over the past five to seven years. Even in Egypt, nearly 75% of franchises opt to represent retail and food brands. Industry experts and leading franchising consulting firms expect the region’s F&B franchises to grow by >25% in the coming years, and maintain their dominance over other sectors like education, maintenance and health services, which are underdeveloped and are growing slowly.
Interestingly, while some leading hospitality brands like Sheraton, Holiday Inn, Meridian, and Ramada have adopted the franchise route in the region, others like Hilton, Marriott, & IFA remain apprehensive because of 1) lack of faith in local franchise’s ability to maintain the brand; and 2) question mark over the model’s profitability without economies of scale.
While the MENA franchising opportunity (especially F&B) seems very attractive, we recommend potential franchises and franchisors to follow the below guidelines to help build a successful franchise business in the region. MENA consumers have high disposable incomes, are perceived as luxury- and brand- conscious, and seem unrelenting in pursuit of the best, thereby encouraging domestic and international franchises to set-up shop in the region. However, the region’s market is idiosyncratic and a strategic entry into the region must also take into account the legal, regulatory, cultural, religious and social norms that define the preferences of the governments and citizens of the region.
Choose the country to enter and ensure compliance with the laws of the land: MENA nations have different varying laws and ownership caps for franchisees looking to set-up operations in the respective nation. The table below from a report by DLA Piper Middle East lists the percentage of GCC- and Foreign- franchisee ownership allowed by different GCC nations.
Apart from the ownership structure, it also important to ensure that you comply with the various franchising related laws, namely, Agency laws, Commercial codes, Companies law, Civil Codes, Judicial Procedural Code, Trade Mark law, Trade secrets/unfair competition law, Employment law, and other laws which regulate import of goods, labelling.
Maximum percentages of ownership in the share capital of a corporate franchisee by GCC nationals and foreigners in each country
Source: DLA Piper Middle East
Choose the right franchising format and partners:
International brands looking to expand rapidly into the MENA region usually prefer to opt for the master franchising (also called as sub-franchising or multi franchising) format. In this format, the master franchisee, or the locally present master licensee, has the rights to further market and sell franchises within a specific territory/country. These partners or ‘franchisees’ open an agreed number of brand stores or outlets in the assigned area. This format is best suited for sectors like F&B, retail, education, beauty services, etc., and is usually adopted by franchisors looking to establish a wide footprint in a short period of time. However, selection of the right master franchise is extremely critical under this model, as choosing the wrong master franchise can result in a break-down of the complete franchising ecosystem.
The product or single-unit franchising format allows franchisees to sells products and/or services on behalf of the franchisor and functions independently with limited assistance. It is best suited for businesses like retailing of jewellery, apparel, and footwear.
The license to manufacture format allows franchisors to grant a license to the franchisee to manufacture products under its brand name in accordance with its specifications and quality standards to be sold in a selective market segment.
Adjust your product/menu for cultural preferences, tastes, guidelines (including religious observance) and customer expectations. This is applicable to all sectors and countries, but is especially true for the F&B sector where companies can gain or lose market share based on their ability to adapt to cultural preferences. The strategy to offer falafels which combined the authentic falafel with global flavors like Emirati, Lebanese, Indian, Greek, Italian, Japanese, Mexican and American is one of keys to the huge success of the Just Falafel food chain (discussed in case study below). Further, Herfy’s strategy of upsizing their chicken pieces with extra batter and adding more fries at a value price helped it displace KFC as the dominant fast food chain in the Saudi Arabia.
Choose culturally appropriate ambiance. For example, café’s in Saudi Arabia generally have a lounge feel with segregated retail space – families and single men.
Location, location, location: with insufficient new properties, rising rentals and property cost, it is difficult to run a profitable franchising business and attract consumer footfalls at the same time. Therefore, it is advisable to look for older properties that require innovative re–modelling and renovation.
Build brand and goodwill by participating in philanthropic and CSR activities. Franchises and franchisors should expand the brand by interacting with the local communities, considering geographic issues, political climate, linguistic and cultural nuances, and taking CSR initiatives.
Case Study: Just Falafel – From a Start-up to the Biggest Falafel Franchise in the World
Just Falafel started what it calls the “falafel revolution”, when it was founded as a single restaurant in Abu Dhabi in 2007. The focus at that time was on creating a 100% vegetarian falafel (a traditional Middle Eastern sandwich), that would combine the authentic falafel with global flavors like Emirati, Lebanese, Indian, Greek, Italian, Japanese, Mexican, American, etc.
However, the turning point in the company’s growth story came in 2011 when the company hired Fadi Malas as its CEO and decided to adopt the franchising model to grow. The company pitched itself to franchises on the basis of 7 factors: clever positioning, brand equity, strong growth, great reputation, commitment to quality, robust franchise system and an innovative menu. The company pushed its franchising agenda aggressively through social media platforms like Facebook. During a 12-month campaign, the company received more than 2,300 requests for franchising from 73 different countries.
Ever since, Just Falafel has grown to be the biggest falafel franchise in the world, with agreements signed with commitment of developing more than 903 outlets in 18 different countries, including rolling out 100 stores in Egypt, 200 stores in the UK, 50 stores in Turkey, 50 stores in New York, US, and 125 stores in Saudi Arabia.
As per Malas, adopting the franchising route helped Just Falafel increase its sales by 35 times and attract USD 200 million to reinvest its brand.
Just Falafel is headquartered in Dubai, UAE, and has regional offices in UK, Egypt, Lebanon, and Turkey. It currently employs more than 400 people worldwide, including 28 in the head office.
Source: Just Falafel
The article was originally published at: Arab Business Review
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