Passing by a cluster of internationally branded fashion stores in one of Cairo's streets recently, Rania Hani wondered how these stores could be operating in Egypt under the same brand name, selling the same merchandise, and even having the same shop designs as in their stores abroad. “One of the stores was indistinguishable from its counterpart that I visited in Spain last year, from the shop's entrance to the way staff members greeted customers when entering,” Hani said. What she had identified is the idea behind the franchise system, which relies on the ability to replicate a product and its associated experience anywhere in the world. The fashion stores that Hani and many others have noted are now operating successfully in Egypt through the franchise model. Franchising is the business practice of emulating a fully-operational business in the same format elsewhere in order to produce the same product or service under the same name, but under different local ownership, and to generate new profits. “Franchise businesses provide you with an operating system and a trade mark along with marketing support and everything you need to get into a business for yourself,” Scott Lehr, senior vice president of US and international development at the International Franchise Association (IFA), said. Lehr said that the advantage of the franchise system was that the local entrepreneur, or franchisee, receives support from the parent company (the franchiser) in a way that helps the entrepreneur to avoid the pitfalls that often afflict typical independent businesses. “We would like to say that you're in a business for yourself but not by yourself,” Lehr told Al-Ahram Weekly on the sidelines of the 2013 MENA International Franchise Exhibition (MIFE), which was held last month in Cairo. In the franchise system, when a franchiser grants a franchisee its service and trademark, the franchiser gets a royalty fee in return. Hatem Zaki, head of non-financial services at the Social Fund for Development (SFD) and a board member of the Egyptian Franchise Development Association (EFDA), said that in business-format franchising, where the franchiser provides the franchisee with a complete plan and format for the management and operation of the franchised business, the franchiser gets an initial fee called an “upfront fee”. The upfront fee normally ranges from LE50,000 to LE50 million, depending on the type and size of business, and it is paid when the contract is signed. Afterwards, the franchiser receives an annual royalty fee that ranges from five to 10 per cent of total sales, Zaki said. In other types of businesses, the franchiser does not define a certain percentage of sales because some businesses do not have points of sales through which the volume of sales can be estimated. “In this case, the franchiser takes a fixed percentage of sales each year,” Zaki said. Franchise businesses have been thriving in Egypt over recent years, and in 2012 there were some 470 international and local franchises operating in the Egyptian market. “In 2012/13 alone, the franchise market grew by roughly 80 businesses,” Zaki said, adding that this figure had the potential to grow. “All businesses are interested in Egypt and its 92 million consumer market,” he said. According to Zaki, such franchises generate approximately LE60-70 billion in direct investment and employ a total of 60,000 to 70,000 people aside from the indirect employment such businesses generate through the franchise supply chain. Annual turnovers are estimated at LE8 to LE9 billion, he added. In addition, franchises help spur competition in the local market, according to Lehr, who said that the difference between starting an independent business and a franchise business was that in the franchise model an entrepreneur has to adhere to the mother company's standards. Lehr said that adhering to such high-quality standards helped raise the bar for consumer services within the market as a whole. However, the process of winning a franchise can be demanding. Mohamed Atef, 29, was unsuccessful when he tried his hand at franchising, for example, having wanted to run a franchise of an international fashion chain. While the process of negotiation went smoothly, Atef was not able to acquire the franchise owing to a lack of retail sales experience. Atef said that the franchiser had also wanted a certain number of stores to be opened each year, along with specific locations. Replicating another business in Egypt is not as unusual as it might seem, since according to Zaki franchising started in the country in the late 1930s when the Singer Sewing Machines Company started operating in Egypt. Singer was the first company to introduce the concept of operating under the same brand name and system of the mother company while franchising its products locally. The franchise system in its current format was introduced into Egypt in the 1970s with the entry of Wimpy restaurants. “The way in which Wimpy was operating, from shop designs to operating systems, sent shock waves through the community and the restaurants enjoyed huge demand,” Zaki told the Weekly. Wimpy generated a range of supply industries that were developed to service the business, creating a long supply chain in Egypt. Working in the footsteps of Wimpy, a number of local competitors began to surface in 1980s, also following a franchise model. In 2006, the franchise market expanded when the government eased tariffs on clothes imports. “Tariffs used to be 280 per cent, which made prices extremely high, but now they are down to 40 per cent,” Zaki said. As a result, many international clothing stores have started to operate in Egypt, encouraging the growth of shopping malls. They are currently 26 shopping malls in Cairo alone, Zaki said. A big chunk of the franchise market in Egypt is comprised of fast-food and clothing brands, the first two sectors that typically cross people's minds when thinking about franchising. However franchising also covers a larger spectrum of specialisations that include maintenance services, security systems, video sales and rentals, healthcare and even printing and copying services. “The list is endless,” Zaki said. “You can do anything through the franchise model.” Zaki said that there were many underserved sectors in Egypt that constituted potential for the country's franchise market. This was particularly true of fast-moving consumer goods, car maintenance, healthcare and security services, he said, the latter being particularly in demand because of the deteriorating security conditions. In a bid to help boost the franchise sector in Egypt, the SFD has some $40 million in hand to fund future franchise projects, and it can lend budding entrepreneurs LE20,000 to LE2 billion per franchise project. It is also offering training to local franchisers and franchisees, while at the same time co-organising the annual MENA International Franchise Exhibition.
