Drapers explains why more retailers are turning to international franchise partners to expand and de-risk ahead of Brexit.
As the UK navigates the muddy waters of the Brexit negotiations and the value of sterling fluctuates, international sales have become increasingly important for retailers seeking to protect their bottom lines. Many are reassessing their international strategies and are increasingly turning to lower-risk franchise partnerships to expand outside the UK.
In August, Marks & Spencer opened talks with one of its franchise partners, Al-Futtaim, to extend their existing partnership to its stores in Hong Kong and Macau, which until now have been company operated. In the same month, Little Mistress Group opened the first four franchise stores for one of its brands, Girls on Film, with partner Alhokair Fashion Retail in Saudi Arabia, and menswear label Simon Carter opened its first three franchise stores with Madura in India.
The popularity of franchising is likely to continue as retailers look outside of the saturated UK market for growth, says Marshall Lester, CEO at consultancy ML Marketing: “There is definitely a move to shrink the UK store portfolio and expand the overseas retail presence in fashion. With the power of online today you don’t need 300 UK stores. However, if you’re serious about growing the brand overseas, you need stores to cement your presence.
“A lot of retailers are becoming more interested in the franchise model as it minimises the capital risk: opening on your own in a foreign market is both risky and expensive. Using an expert retail group in your chosen market maximises the potential for success. The retailers I work with want expertise and financial security, and an established partner can offer that.”
M&S, which has more than 270 franchise stores across 32 markets, explains that it creates a more profitable, “sustainable” model. Al-Futtaim already operates 43 M&S stores across seven markets in the Middle East, Singapore and Malaysia. If the new deal goes ahead, it will become the sole franchisee for M&S in Hong Kong and Macau.
Franchising is a capital-light, low-risk model, which offers us immediate returns
Paul Friston, director of international, Marks & Spencer
Paul Friston, director of international at M&S, tells Drapers that by strengthening established franchise partnerships, the business can “better understand its customers” and keep costs down: “We’ve simplified our structure so we can work more effectively, and we’ll be focusing on using the talent and expertise of the wider M&S team, as well as strengthening our planning and review processes.
“We work with some of the world’s leading retail operators, and benefit from their scale, existing infrastructure, local knowledge and presence in key shopping locations. From an investment perspective, it is also a capital-light, low-risk model, which offers us immediate returns.”
Another brand with an established international franchise business is Superdry. It already has 362 stores in 50 countries, but is also ramping up its partnership portfolio.
Its franchise division will grow 20% year on year for the foreseeable future, predicts global trading director Jon Wragg: “We’re opening between 50 and 70 net franchise stores a year. The benefit of using the franchising model is it gets you stores in markets where you don’t want to open your own. They build up brand awareness and increase market share in those countries. Financially it is very capital light and, if it doesn’t work, you don’t have a problem lease to deal with.”
Wragg believes franchise stores will become bigger, and more digital and experiential, following UK fashion retailing trends: “We’ve rolled out iPads to our franchise stores, so shoppers can place orders to our website on which we pay a commission to the franchise partners. We see that extending to gift cards and other areas.
“I also see a trend for bigger franchise stores, as these will allow more experiential elements to be introduced.”
Superdry is starting to open larger-format stores that are more than the double the size of its average 2,000 sq ft franchise shop.
Despite the advantages, Wragg points out that embarking on a franchise partnership is not without risk: “They need to work. If the stores don’t work, the brand can be damaged and growth can be hindered. We work closely with our partners to create successful businesses. The store fit-outs are all to the same specifications, and the local teams get support from us for planning and training staff to give it the best chance of success.”
Lester echoes this warning, arguing that the success of any franchise store is dependent on the effort both parties invest in it: “The retailer or brand has to do their part, too. You can’t go into a new market and expect everyone to know who you are. You can’t assume that what you do in the UK will work overseas. The colour, sizes, designs of the products may not be right, or the marketing campaign might not translate outside the UK.
“If a brand wants to make an impact abroad, it needs to work with its franchise partner to adapt to the market. You need local knowledge to survive.”
A franchising partnership is like a marriage: it is based on trust
Simon Carter, founder of Simon Carter
For Little Mistress Group, local knowledge was critical when selecting a franchise partner, says founder Mark Ashton: “[Alhokair] has huge market data and product knowledge. Most of the bigger [franchisees] own shopping malls or real estate, which is a huge benefit. They will support you on marketing and advertising, operations and management. Alhokair operates more than 2,100 stores in 17 countries for more than 116 brands, including M&S, F&F, Quiz and New Look.
“We spent some time in Saudi Arabia to study the market and weigh up the opportunities. I knew we could make a big impact on this market, particularly with our embellished pieces. We went in with an open mind.”
Simon Carter, founder of the eponymous menswear and accessories brand, plans to open a total of 10 franchise stores in India by Christmas.
“Your partner must have a good track record and the ability to deliver, which Madura [which is part of Aditya Birla Fashion and Retail and also works with Louis Philippe, Van Heusen, Hackett and Forever 21] has,” he argues. “It lowers the risk of expanding. A franchising partnership is like a marriage: it is based on trust.”
We don’t want to put all our eggs in one basket, so we’re looking globally and at emerging markets specifically
Rebecca Rajeswaran, international and finance director of BHS International
Carter has taken a different approach to most in this franchising deal by also signing a licensing agreement with Madura to allow the products for the Indian stores to be made in India. This keeps the prices relevant for the local market, while retaining the essential design elements of the brand.
“For me a £150 shirt would be too expensive in India once you add on the import duties,” he says. To get the right price and margins, I decided to go down a licensing route. They can tweak the product under the brand guidelines to make sure it is right for the market.
Carter declines to provide princes for the Indian range.
“My advice for anyone thinking about franchising is to decide if they want global pricing or if they are prepared to change the product and the prices to suit the market. For me having a vertical operation in India made more sense, and in a post-Brexit world we have to look at every opportunity globally.”
Rebecca Rajeswaran, international and finance director of BHS International, says the retailer wants to expand its existing franchise operation – comprising 20 stores in 10 countries focused on the Middle East – to other emerging markets.
“The Middle East has become more competitive and the economy isn’t as buoyant there as it was 10 years ago. We don’t want to put all our eggs in one basket, so we’re looking globally and at emerging markets specifically. We’re also open to adapting the model, so having a womenswear-only store, or a sleepwear-and-lingerie-only store.”
As with all opportunities in fashion retail, franchising carries risks as well as rewards. However, as the model develops and stores become more digital, larger and experiential, they offer UK retailers a lower-cost way of building their brands – and sales – internationally. As more retailers seek to strengthen their businesses beyond the UK, finding and working closely with the right partner could lead to global success.