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FRANCHISING OUTGROWS FAST-FOOD PHASE
BY ALEXANDRA SANDELS
Mention the word “franchise” and
Egyptians inevitably envision fast-food chains such as McDonald’s,
KFC or Pizza Hut. But in recent years, franchising in Egypt has
become far more diversified to include everything from realtors
to courier services to lingerie shops.
With more than 72 million consumers and substantial population growth,
Egypt has raised the eyebrows of investors and appeared on the radar
screens of major international chains. The newfound interest is
a golden opportunity for local entrepreneurs, who have been able
to cash in on the country’s unremitting obsession with food
and brand name goods. Franchising is taking off in Egypt, and –
as a regional franchising conference held last month in Cairo showed
– the opportunities are increasing.
“Egypt is a great market for franchising and everyone is starting
to notice it,” says Hatem Zaki, board member of the Egyptian
Franchise Development Association (EFDA), a non-profit organization
formed in 2001 to promote the franchising model in Egypt. “The
country possesses a high number of skilled laborers, providing businesses
with a strong supply chain of workers. [It is] one of the most competitive
markets for franchising in the world at the moment.”
From the handful of franchises operating in Egypt in the 1980s –
mostly fast-food chains – the number has grown substantially
to more than 300 franchises and 4,000 outlets, with ever-widening
diversity. According to EFDA figures, direct franchise sales in
Egypt topped LE 7 billion in 2006, while indirect sales reached
as high as LE 30 billion. The franchise boom has also had a positive
impact on employment, creating more than 40,000 direct jobs and
over 500,000 indirect positions for Egyptian workers in recent years.
The franchising model dates back to the Middle Ages in England,
where it was originally used as a form of land tenure. The model
we know today dates to the 1960s, when US business seeking to expand
the reach and sales of products and services adopted a partnership
model that leverages the experience of the franchisor, who licenses
their trademark and system of doing business, to a franchisee, who
pays an upfront fee and annual royalties for the right to utilize
that trademark in a particular market and to acquire the know-how
and support services associated with the brand.
For Egyptian entrepreneurs, local know-how coupled with an international
brand has proven to be a winning combination. “Many [entrepreneurs]
simply buy a franchise from a local company, which is the easiest
way, or open their own company, which doesn’t take long with
the right lawyers and accountants,” says Zaki.
Iman Ghaly, manager of Stirling, a local retail chain for fine handmade
silver jewelry, believes franchising is becoming an increasingly
popular business model in Egypt because it is “a trusted global
method” with a proven track record. “We Egyptians tend
to trust safe waters – which means business concepts that
have proven fruitful to others. Franchising is one such formula
and hence the growing interest in it,” she told Business Monthly.
“We opened a year ago and we currently have five franchisees
and one company-owned outlet. Things have been going well,”
she says. “The technical part is really easy. I can’t
recall any procedural problems.”
One challenge she does face, particularly as a non-traditional franchise
industry in Egypt, is selecting the appropriate location for outlets.
“Since we don’t sell regular commercial products and
because we have a very specific clientele, we have to be extremely
careful picking our locations and even our franchisees. Finding
the perfect location, atmosphere and franchisee – that’s
the real hard part,” she emphasized.
Stirling is based in Cairo, but Ghaly says the chain expects to
open franchise outlets in Sharm Al Sheikh and Hurghada in the near
future.
While the number of franchises in Egypt’s metropolitan cities
of Cairo and Alexandria is quickly increasing, upscale tourist hot
spots are also an important target for investors. “It’s
important to remember that international monster chains such as
Hard Rock Café and Burger King are choosing chic tourist
hubs such as Sharm Al Sheikh before coming to Cairo,” Zaki
points out. “A small area filled with high-income people –
that’s an investor’s dream.”
But there is also good business in being a pioneer in your industry,
says Hossam Refaat Hassan, chairman of Bernasos Stationery, a local
company established in 1912 currently exploring franchise opportunities.
“We were one of the first chains selling stationery and office
and software supplies in Egypt, and remain one of the few in the
market to this day. Being the first in your industry provides you
with a lasting competitive edge.”
Working in Egypt’s favor as a franchise destination is the
country’s sizeable population base, as well as the affordability
of other business basics such as land and labor. But equally appealing
to international franchisors, argues Zaki, is Egypt’s trade
agreements with neighboring nations, such as the Greater Arab Free
Trade Agreement (GAFTA) and Common Market for Eastern and Southern
Africa (COMESA).
“Since tariffs on goods transported between Egypt and neighboring
countries [are negligible], many international as well as local
entrepreneurs and investors have started operations in Egypt,”
he says. It has also encouraged local franchises to expand regionally.
“Just look at fast-food chain Mo’men, for example. They
operate out of Egypt and send food and supplies to their branches
in Sudan from their base [here].”
Similarly, Cairo-based Kabnoury, an established manufacturer of
doors, kitchen cabinets and windows, operates a growing number of
franchise outlets in the Gulf and Africa. “We manufacture
our products in a factory here in Egypt and then ship them to our
franchisees. It’s a cheap and efficient process due to the
low export tariffs,” says Mahmoud Thabet, the company’s
general manager for export and import. The company plans to expand
its franchise network, with outlets expected to open soon in Algeria,
Tunisia, Dubai and Qatar.
International fashion chains have been a big part of Egypt’s
booming franchising industry due to recently lowered tariffs on
clothing imports. “Since the tariffs were lowered two years
ago, we have witnessed a 200-percent increase in clothing franchising
in Egypt,” Zaki says.
Stirling’s Ghaly points out that Egypt’s “brand
obsessive society” makes the country a good target for international
brand chains. “People in Egypt love name brands and prefer
buying brands, especially when it comes to clothing. International
clothing chains will almost always find success in the Egyptian
market,” she says.
While the majority of clothing franchises in Egypt used to be American,
most of the new ones setting up outlets are European, including
Mango, Promod, Morgan and Bata. “They’re all either
Spanish, French or Italian,” says Zaki.
But setting up one of these high-profile franchises is not exactly
cheap. Upfront cash investment to open a franchise for a chain like
Morgan for instance, ranges from LE 260,000 to LE 900,000.
And expect more European chains to arrive as investors gear up for
the implementation of the Euro-Mediterranean Free Trade Area (EMFTA),
a free trade agreement between the 27-member EU and eight partner
states in the Middle East and North Africa (MENA) region expected
to enter into force in 2010. EMFTA member states will enjoy a gradual
implementation of free trade in manufactured goods and progressive
liberalization of trade in agricultural products. The agreement
also aims to increase economic, social, cultural and financial cooperation
between members.
When fully realized, the EMFTA will include some 40 states and 600-800
million consumers in Europe and the MENA region, including Egypt.
In addition to continued steady growth in the clothing franchise
industry, Zaki foresees a major boost to the health and fitness
industry in the next few years. “It seems as if the health
craze has finally reached Egypt. Gyms, beauty clinics and health
food chains are opening left and right in the country these days,”
he says.
Cairo has already attracted the attention of international fitness
chains such as Gold’s Gym, which opened its first franchise
outlet in Egypt in 1998, and Curves, a women’s fitness chain
expected to open its first club in Cairo later this month. The franchise’s
chief rival, Contours Express, an American weight loss and fitness
studio for women, is also reportedly eyeing Egypt as a potential
franchise market.
The time may also be right for American sandwich chain Subway, with
26,000 stores in 85 countries, to make another attempt at the local
market. The healthy lifestyle franchise opened in Cairo in the 1990s,
but seems to have overestimated health consciousness. However, the
recent upsurge in health and fitness in Egypt might mark the right
time for a fresh attempt.
Shawn Hesham Karama, director of franchising outlets of Subway in
Egypt, says he hopes to open a number of Subway stores throughout
Cairo in the coming period. “I’ve noticed an increasing
number of Egyptians [joining] the health trend lately, so I expect
a large demand in health foods in the near future,” he told
Business Monthly. “We are in the process of opening up stores
that will feature healthy sandwiches accompanied by fresh fruit
and yoghurt instead of chips in an effort to emphasize the importance
of healthy living to the Egyptian people.”
One booming industry in Egypt that seems to have escaped the public
eye is the training and education sector. “This is a very
quickly growing industry that I foresee gaining significant competitive
advantage in the coming years,” says Zaki. “A good example
of this model is the global educational network Axon, a franchise
chain currently providing language and computer training to both
children and adults in more than 22 schools in Egypt. They’ve
experienced lucrative business ever since their establishment in
Egypt in 2004.”
A veteran on the Egyptian business market, Bernasos Stationery’s
Hassan emphasizes that whatever sector an entrepreneur chooses to
enter, good partnership relations and long-term thinking are crucial
for success in the franchise model. He advises that both sides take
time to understand the partnership arrangement. “It’s
important both as a franchisor and franchisee to get involved with
people you trust. You must also have developed a long-term plan
for your business before signing on,” he says.
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