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Franchises target Africa with fashion, food and fitness

As developed markets stall, sub-Saharan Africa is the new growth zone for global brands

Reuters, Saturday 8 Sep 2012

From fried chicken to ice cream and body-building supplements, international franchises are making inroads into Africa, tapping into consumers' hunger for their brands as developed markets stagnate.

Hilton Hotels, owned by asset manager Blackstone, Yum Brands' Kentucky Fried Chicken and the fashion retailer Mango are some of the companies driving the growth of franchising in Africa. Others in the fast food, automotive and education sectors are also expanding into the continent.
Franchising creates opportunities for African entrepreneurs and provides jobs in the formal sector, while for brands it is a chance to enter a new market at a lower cost and with a business partner who is familiar with the terrain.
"It's an inexpensive means to expand using the money of others," said Kendal Tyre, editor of a new book on franchising in Africa. "You have a franchisee who is coming in and paying a franchise fee to have access to your system that you've developed over some period of time."
However, weak judicial systems, corruption and poor infrastructure are still deterrents for potential franchisors. The repatriation of profits from some African countries can also be difficult and there are concerns about the protection of intellectual property.
Until recently, franchising in Africa had only taken hold in the continent's more advanced economies, such as South Africa and Egypt. South Africa's 300 billion rand ($36 billion) franchise sector accounts for 12 per cent of GDP, according to Standard Bank.
The industry employs around 500,000 people directly. Nearly 700 brands operate franchises, including KFC and McDonald's, and home-grown businesses such as Nando's, a chicken restaurant.
But as Western brands face slowing growth at home they are paying closer attention to the rest of Africa, encouraged by legal and economic reforms and governments keen to spur the growth of small businesses, said Tyre, who edited Franchising in Africa: Legal and Business Considerations.
Countries such as Nigeria, Kenya and Zimbabwe have established franchise associations, which can provide a code of ethics and standards and also assist in disputes. The African Development Bank (AfDB) is also helping Senegal, Tanzania and Ethiopia set up their own associations.
As more Africans enter the middle class, franchisors also hope to benefit from pent-up demand for their products. By 2020, Africa's consumer spending will amount to $1.4 trillion and 128 million households on the continent will have discretionary income, according to McKinsey.
"There's a growing middle class that is really eager for a lot of goods and services that aren't currently available," said Tyre. "And it's not simply fast food. It's automotive, beauty, clothing stores, professional services, childcare."
Franchising in Nigeria, whose 160 million people have an almost insatiable desire for imported goods, is still in its infancy but firms see it as too big to ignore, said Anayo Agu, a commercial specialist at the U.S. consulate in Lagos.
"In the last two years we've noticed tremendous interest in Nigeria," he said. "If you can access Nigeria you actually have the whole of Africa to tap into."
KFC, which entered Nigeria in 2009, is the most well-known international franchise. Spanish fashion retailer Mango also has three stores in the country, adding to its five in South Africa.
Two major fast food retailers are due to set up franchises before the end of the year, said Agu, declining to name them. He added that an ice cream retailer was also looking to move in.
Other U.S. firms that have signed deals include Crestcom International, which provides management training, Precision Tune Auto Care and IN2IT, a nutrition and fitness franchise which offers kickboxing and pilates classes, along with muscle building pills and protein shakes.
Agu believes franchising may be the best way of limiting Nigeria's huge informal sector as it gives entrepreneurs a template for running a business.
"The biggest problem is getting people to understand that the only way you can run a business and grow it is if it is system-driven," he said. "Once you have a system like that you can't avoid tax. You must play by the rules."
Many countries have made progress in the areas of intellectual property protection and repatriation of profits, but franchisors often find it difficult to seek legal redress for problems because of inefficient legal systems, according to the AfDB, which is planning its first conference on franchising in Africa next year.
Perhaps the biggest sign of progress would be the proliferation of McDonald's restaurants throughout Africa. It is only in a handful of countries, like South Africa, Mauritius and Egypt, suggesting others do not meet its stringent rules and standards.
"It gives you a good indication of whether or not there's something important missing," said Robert Zegers, chief investment officer at the AfDB. 
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