Franchising in the Middle East

By Martin, Josh | Management Review, June 1999 | Go to article overview
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Franchising in the Middle East

Martin, Josh, Management Review

With an oversaturated marketplace looming, more American franchisors are setting their sights on the Persian Gulf.

Americans traveling in the Persian Gulf may stum-ble across some familiar signs of home: Amid the minarets and sand dunes are the recognizable signs of Kentucky Fried Chicken, Hertz Rent-A-Car, General Nutrition Centers and the like. Ten years ago, only a handful of American franchises existed in the region, but the Persian Gulf is regarded as one of the most lucrative and tempting markets in today's otherwise sat-urated marketplace.

As the potential for expansion in American markets has stagnated, franchisors have begun to look at overseas markets like the Persian Gulf to maintain growth. At stake is a $200 billion consumer market in which de-mographics and recent legal reforms have created conditions that make the region attractive for a steadily growing number of U.S. franchisors. "The choice is either to stagnate or to go overseas and grow," says Don DeBolt, president of the International Franchise Association, Washington, D.C.

Leonard N. Swartz, worldwide managing director of franchise ser-vices at Arthur Andersen, a Chicago-based consulting firm, agrees with that notion. "In franchising, you have to look at the world today," he says. "You can't just say, 'I'm only doing the U.S.'" For franchisors entering the Persian Gulf countries, it is a bottom-line decision. Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates all contain the three key factors American franchisors want to see: a middle-class consumer market with demand for their product or ser-vice, a favorable trade and investment regime and willing local investors.

And industry sources estimate that as much as 10 percent of the $425 mil-lion in overseas franchise revenues will come from the Middle East this year, making the region more important for them than for most other U.S. goods and ser-vices exporters, as the region represents only 5 percent of total U.S. international trade.

A Business Template Of course, not everything can be franchised in the Persian Gulf countries: The market is still young. However, when Dubai hosted the Middle East Franchising and Licensing Exhibi-tion two years ago, approximately 100 interna-tional franchisors participated, including more than 50 from the United States. The United King-dom, Japan and France also were represented.

There were well-known names like the Athlete's Foot, Domino's Pizza, General Nutrition Centers, King Features and Mail Boxes, Etc., but dozens of lesser-known operations also wanted to cap-italize on economic development in the Gulf.

Most franchises entering the region remain in the restaurant and retail trade areas, however.

Nearly all major U.S. fast-food chains have opera-tions there, and they were followed by non-con-venience retail food, automotive products/ser- vices and education products/services. Industry experts are not surprised by these results. "In emerging markets, food franchisors usually go in first," notes Marcel Portmann, director of interna-tional development at the International Franchise Association. "After all, everyone has to eat."

Experts believe that as Persian Gulf economies mature and govern-ments are forced to give private-sector entrepreneurs more freedom to ex- pand, franchising opportunities will grow for both consumer and business-to- business ventures, such as computers and healthcare. It is an accepted and popular form of foreign presence, in large part because local nationals own and operate the local outlets. "Arabs understand the concept of fran-chising, with its cash and quality controls," says Charlie Weeks, vice presi-dent of Middle East and Latin American Operations at A&W Restaurants Inc. "It ties in nicely with the commercial culture there. They understand they're getting a template to build a business."

Indeed, Arab entrepreneurs have been the driving force behind fran- chising in the Persian Gulf.

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