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Franchises in the Gulf: burgers rule.

From Morocco to Oman, popular Western commercial images are proliferating through franchise operations. The growth in the number of franchise, reflects both the growing importance of Middle East markets, and the effectiveness of changes in local commercial law.

The images are familiar, but the settings are different: Planet Hollywood in Dubai, Walt Disney in Riyadh, Wimpy's and McDonald's in Cairo. The fact that such popular franchise chains are present in the Middle East would have been unthinkable a few years ago.

There are now over 1,000 franchise operations in the Arab Middle East, selling everything from fast food to chic fashion. The Gulf is regarded as one of the most lucrative and tempting markets for European, Japanese and American franchisors. And the numbers of franchise operations in Saudi Arabia, Egypt, and the UAE are growing at double digit annual rates.

According to figures gathered by the International Franchise Association and the US International Trade Commission, the most successful franchisors entering the Gulf (in terms of number of franchise outlets present) have been restaurants, retail food chains, automotive-related outlets, and education products and services.

Although initial entrants were restaurants - virtually all major American and British fast food chains now have franchise operations in the Gulf- followed by retail and automotive chains, more sophisticated franchise operations are beginning to open. These include computer sales chains, educational services, and business-to-business operations. Today, the mix includes such outfits as Fourth R, a chain of computer schools, and General Nutrition Centres, which sells vitamin supplements and other popular health and fitness products. Amid the minarets, camels and dhows are the recognisable logos of Domino's Pizza, Kentucky Fried Chicken, Wimpy's, Hertz Rent-A-Car, and dozens of other franchise operations.

Industry experts are not surprised at the current mix. "In emerging markets, food franchisors usually go in first," notes Marcel Portmann, director of international development at the International Franchise Association. "After all, everyone has to eat."

Experts believe that as Gulf economies mature - and governments are forced to give private sector entrepreneurs more freedom to expand - more business-to-business franchise operations will go in.

At stake is a $200 billion consumer market - a market where demographics and recent legal reforms have created conditions which make the region attractive for a growing number of franchisors.

"Going into the Middle East is a fairly logical move for American franchisors," says Prince Bandar bin Saud, secretary-general of the King Faisal Foundation (KFF) of Riyadh, Saudi Arabia. "The market for retailers is thriving."

The KFF itself has gotten into the act, developing a "super mall" scheduled to open next year, whose shops will include such franchise outlets as Wendy's, Baskin-Robbins, CK Jeans, Bally and Bennetton.

Saudi Arabia remains the favourite target market because it has the largest end-consumer base. But the United Arab Emirates boasts a higher per capita income, and a more franchisor-friendly legal environment.

"You have to go country by country," says Don DeBolt, president of the Washington-based International Franchise Association.

Efforts to create a common market, under the Gulf Cooperation Council, have helped. Among other things, corporate entities in one member country are increasingly given "national" treatment in other GCC member states - an important fact for franchisors issuing a licence covering a multinational "territory". Legal reforms have also encouraged franchisors to come in, by streamlining applications to do business and offering improved trademark, logo, and intellectual property protection.

Although franchisors usually go to great lengths to protect their image, and make detailed stipulations about what a local franchisee can and cannot do, some flexibility is needed to meet local market conditions. "Any franchisor that wants to successfully do business in the Gulf has to have some adaptability and flexibility," says Charlie Weeks, vice president of Middle East and Latin America Operations with A&W Restaurants, Inc, an American franchisor.

A&W allowed its Egyptian franchisee to develop special food products for the menu during the Muslim holy month of Ramadan. In Saudi Arabia and Qatar, standard restaurant design was altered to include "family areas", in accordance with local customs dictating the seclusion of women even in public places.

Although exercising flexibility, A&W retained final authority over all such decisions - an authority written into master franchise and subsidiary agreements. It is an example of the careful preparation experts say is a must for any company franchising in the Gulf.

The most crucial factor, many experts say, is choosing the franchisee or master licence holder.

"I know of no region in the world where finding a good local partner is so important," says Phil Zeidman, partner in the Washington, DC-based law firm of Rudnick, Wolfe, Epstien & Zeidman.

Often, it is a choice made from a small pool of inter-related families like the Al-Futaim and the Al-Tayer, which have long dominated commerce in the Gulf irrespective of national boundaries. "In most other regions of the world, a franchisor would not consider awarding a master contract for more than one country," notes Ziedman. "But in the Gulf, you're dealing with a small sliver of the population, in which key families are often related. The only parallel is with the overseas Chinese of Southeast Asia."

And yet the lure of the Gulf seems irresistible. Zeidman himself sees two major reasons for this: "Receptivity to Western goods and services has grown," he says. The local end-customer base is already in place. The region boasts a rapidly growing population with high living standards - the United Arab Emirates, for example, ranks among the world's top 10 countries in terms of per capita income. Moreover, there is a customer predisposition for Western, and particularly American, goods and services.

On the other side of the equation, Zeidman points out that franchising "can allow you to penetrate this market faster than you would through internal resources."

Other experts add that it is one of the safest ways a company can globalise. "Franchising limits risk exposure in overseas markets, while extending and expanding the parent company's market," says Leonard N. Swartz, worldwide managing director of franchise services at the consulting firm Arthur Andersen.

Profitable franchising opportunities in the Gulf are expected to grow rapidly, fuelled by local private initiative, as those economies mature. It is an accepted and popular form of foreign presence, in large part because local nationals own and operate the local outlets.

Ironically, there have been few attempts to create indigenous Arab franchises. One reason for this is that there are few local products or services which can be competitively exported to other countries. El-Fishawi, a famous Egyptian cafe, succeeded in opening franchise operations in Saudi Arabia and Lebanon a few years ago. But it is an exception.

Much of the attractiveness of franchises for Arabs is that they bring in a profitable taste of American or Western culture.

As a result, most franchisors with licences in the Gulf have been in the envious position of not having to 'sell' their product or the concept of franchising. In many cases, franchisees were educated in, or have travelled to, the US, where they were exposed to franchised products and services.

It is a uniquely friendly form of international commerce: "Arabs understand the concept of franchising, with its cash and quality controls," says A&W's Weeks. "It ties in nicely with the commercial culture there. They understand they're getting a template to build a business." And the foreign franchisor collects a profit on every sale.
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Comment:Western businesses are expanding in the Persian Gulf region through franchise operations, which have been growing at double digit annual rates.
Author:Martin, Josh
Publication:The Middle East
Geographic Code:70MID
Date:Apr 1, 1999
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