March 23, 2023 | Quick Service Restaurants | By Kapil Nagpal, QSR and Digital Transformation Consultant
How important are international markets for US fast-food brands, and how much can they rely on local master franchise operators?
According to McDonald’s 2020 annual report, nearly 70% of McDonald's restaurants were located outside of the United States, and international sales accounted for approximately 40% of the company's total revenue.
This highlights the global appeal of the McDonald's brand and its success in adapting its menu and marketing to appeal to customers in different countries and cultures. Other brands also have observed double-digit growth in international markets, making it an important strategic pillar for fast-food brands.
Factors to consider when entering international markets
Expanding a fast-food franchise to international markets requires careful consideration of various factors to ensure success. Here are some of the factors that hypothetically a US fast-food franchisee chain would consider when expanding to international markets in Asia, Europe, Australia, etc.
1. Total addressable market and the business case: The first step is to identify the total addressable market, and make a business case for or against expanding internationally. Weighing the investment and risk against the estimated value is an important exercise to prioritize and fund resources for international expansion. The franchisee chain should consider the financial implications of expanding into new markets. This includes assessing the investment required, potential profits, and risks associated with the new market.
2. Target market research: The franchisee chain should conduct extensive market research to understand the target market's preferences, tastes, and cultural differences. This information will be essential in adapting their menu, marketing strategies, and overall business operations to meet the needs of the new market.
For example, beef consumption is generally looked down upon in India so McDonald’s really hit it with local ingredients like Paneer and Aloo (potatoes). They did keep classics like Filet O’ Fish and Spicy Chicken Sandwich. Similarly, many Muslim countries forbid pork consumption, so fast-food chains cannot add bacon or ham to their products.
3. Legal and regulatory requirements: The franchisee chain should comply with the legal and regulatory requirements of each country they are entering. This includes obtaining the necessary permits, licenses, and adhering to local labor laws. For example, Muslim countries require the food to be halal certified. This would require a fast-food chain to source materials from halal-certified suppliers.
4. Cultural differences: Cultural differences such as language, religion, and social customs should be taken into account. The franchisee chain should ensure that their menu and advertising are culturally appropriate. For example, alcohol is banned in the middle east market. So it might be prudent to replace beer with soda when running commercials about parties and events.
The Qatar world-cup was an example of an alcohol-free event and triggered a lot of buzz on social media among football fans.
5. Supply chain and logistics: This is perhaps the most time-consuming and requires careful decision-making. The franchisee chain should ensure that their supply chain is efficient and can meet the demand of the new market. They should identify reliable suppliers and logistics companies to ensure the quality and consistency of their products. The poor road infrastructure and fluctuating oil prices in emerging markets can make it really difficult to transport goods on-time. Companies may think of sourcing ingredients locally.
McDonald’s collaborated with potato farmers in India thereby building an organic localized supply chain across the country.
The difference in produce and meat quality and variety may also be factored in when adjusting recipes for international markets.
“Honestly, the KFC spicy chicken in India tastes so much better than in the US. It is smaller in size but has a better taste and texture. Chick-fil-A, when are you coming to India?”
6. Brand adaptation: The franchisee chain should consider adapting their brand to suit the local market. This may include modifying their logo, packaging, and advertising to resonate with the new target audience. While I don’t recall any changes to the logo, brands do localize their taglines based on the international market.
“We all know McDonalds as a dominating global phenomenon and rightfully so. McDonalds localized both their slogan and their menu items for all 101 countries in which they operate. Meaning, “I’m lovin’ it” wasn’t just translated verbatim into different languages, but instead, localized to embody and express the same on-brand message in different locales. For example, in Spain, the slogan they use is “Me Encanta” which translates to “I love it”. However, in France, they use “’est tout ce que j’aime” which means, “ I love everything” and in the Philippines the slogan is “love ko ‘to” which is understood as, “I love this”. - Alexa Tan, Lilt.com
7. Marketing strategy: The franchisee chain should develop a marketing strategy that targets the new market. This should include traditional advertising methods as well as digital marketing.
Partnering with local Tik-Tok / Instagram influencers is a great tactic to gain brand recognition.
8. Human resource management: The franchisee chain should ensure that they have the necessary staff to manage the new market. They should identify key personnel and provide them with the necessary training to ensure success.
9. Competitor analysis, differentiation, and consistency: The franchisee chain should conduct a competitive analysis of the new market to understand their competition and develop a strategy to differentiate themselves.
For example, McDonald’s really elevated the dine-in experience in India by providing great service, clean and appealing restaurant ambience. Similarly, Domino’s has carved out a reputation for delivering pizzas in less than 30 minutes to the customer’s doorstep for free!
Differentiation takes time, but it is very important given that even emerging markets now have exposure to multiple brands.
The customer’s wallet share cannot be taken for granted.
Master franchisors & partnerships
Franchise-based businesses often rely on partnering with master franchise operators to enter and scale quickly in international markets. The same applies for large fast-food chains like Subway, Domino’s, KFC, and Burger King to name a few.
“McDonald’s, globally, does not like to own its ventures or operate them. Its preferred model is a low-risk, low-hassle one: license out the brand for a fee to a local player; on top of that, charge a royalty linked to sales. So, the more the outlets sell, the more money McDonald’s makes. Of its 34,000 outlets in 118 countries, 80% are through the franchise route. But when it entered developing countries, McDonald’s often did so via the ownership model. A case in point was India, where it entered in 1995, with two 50:50 joint ventures, one with Bakshi and the other with Jatia.” – Article in Economic Times, India 2013
"Subway Announces Its Largest Ever Master Franchisee Partnership With Everstone Group To Expand Its Presence In India. Today's announcement represents a significant step in Subway's transformation journey and global expansion plans," said John Chidsey, Chief Executive Officer of Subway. "Everstone, with extensive knowledge and proven restaurant operational expertise in the region, is the ideal partner as we begin this new chapter for Subway in India and South Asia. The scale of this agreement is unprecedented and will ensure that Subway's presence across India will more than triple over the next 10 years," said Mike Kehoe, EMEA President at Subway." – PR News Wire Article 2021
Advantages of partnering with a master franchisor
1. Real-estate knowledge and localized expansion strategies: Partnering with a master franchise operator can help a fast-food chain expand rapidly into new markets, both domestically and internationally. This can increase the brand's visibility and market share. MFA operators have the local presence and infrastructure investments that allow them to scale the brand quickly.
2. Reduced upfront investment and financial risk: By partnering with an experienced master franchise operator, a fast-food chain can reduce the risks associated with entering new markets. The master franchise operator can provide local market knowledge and expertise, which can help to minimize risks, and lower the investment burden in exchange for a revenue share.
3. Reduced capital expenditure and lower operating costs: A master franchise operator typically bears the costs of opening new franchise locations. This can help the fast-food chain to reduce its capital expenditure and overhead costs.
4. Increased royalties and speed to market: The master franchise operator is responsible for paying franchise fees and royalties to the fast-food chain. This can increase the chain's revenue without incurring additional costs.
Local market expertise and cultural awareness: A master franchise operator has a deep understanding of the local market and culture. This can help the fast-food chain to adapt its products and marketing strategies to suit local tastes and preferences.
Considerations and potential drawbacks of partnering with a master franchisor
1. Reduced operational oversight and control: When a fast-food business partners with a master franchise operator, they may relinquish some of their control over the franchise operations. While the operator is required to follow certain standards, the business may not have direct control over every aspect of the franchisee's operations such as sourcing and procurement, local hiring, restaurant location and format selection, local pricing, and promotions.
2. Potential conflicts of interest: Since the master franchise operator could be partnering with other brands and running multiple locations, there may be conflicts of interest that arise. For example, they may prioritize the success of their own locations over the success of the business as a whole, or they may prioritize their own profits over the long-term goals of the fast-food parent.
3. Potential brand dilution: If the master franchise operator fails to adhere to the business's standards or engages in unethical practices, it can reflect poorly on the entire brand. This could lead to a loss of customer trust and damage the brand's reputation. Going with a credible master franchisor that can deliver the fast-food dining experience with consistency is key.
4. Limited growth potential: While partnering with a master franchise operator can help a business expand into new markets more quickly, it can also limit their growth potential. The operator will be responsible for finding and opening new locations, and if they are unable or unwilling to do so, the business's expansion may be stalled.
5. Costly fees: The master franchise operator will typically charge fees to the business for their services, which can be costly. These fees may include royalties, marketing fees, and other expenses, which can eat into the business's profits. However, this may be a reasonable tradeoff to tap unchartered markets thereby making this strategy hugely popular with major fast-food brands.
In summary, there is a strong trend of international expansion but comes with its caveats and guiding principles. US fast-food brands historically may have taken international markets for granted; However, many US brands are experiencing double-digit growth internationally, bringing the attention of the investors and the company leadership to expand internationally.
Gravitas is a digital transformation consulting firm.
We help clients scale and improve their businesses by leveraging digital enablers and the best practices of Fortune 500 companies. We do that by combining our expertise in data and analytics, building digital capabilities, creating stellar experiences and products, delivering programs, and managing change. We are experienced in the fast-food and casual dining restaurant industry. Our experience spans small businesses to global iconic brands.