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Franchising in Emerging Markets: The Case of Algeria

Franchising in Emerging Markets: The Case of Algeria. Presented at the 8 th International Conference on Economics and Management of Networks November 15-17, 2018 Havana, Cuba. I. Introduction.

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Franchising in Emerging Markets: The Case of Algeria

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  1. Franchising in Emerging Markets: The Case of Algeria Presented at the 8th International Conference on Economics and Management of Networks November 15-17, 2018 Havana, Cuba

  2. I. Introduction • Franchising has made significant progress in a number of emerging countries (South Korea, Brazil, Vietnam, Malaysia, etc.) • Algeria, an emerging country with a heavy dependence on natural resources, can greatly benefit from franchising • However, it seems that franchising is at best marginal in Algeria’s economy • In this study, we investigate the reasons why franchising has not emerged as a significant strategy in its economic development • This investigation is based on prior research and a new survey of franchise experts operating in Algeria • We identify major roadblocks for the development of franchising; and • We make recommendations to boost the importance of franchising in tackling Algeria’s economic challenges Aliouche, Bonet-Fernandez, Guechtouli, Guechtouli - IRMBAM 2018

  3. I. Introduction • Algeria: Emerging country with large natural resources • 10th largest natural gas reserves in the world • 16th largest oil reserves • 6th largest exporter of natural gas • Some economic and social achievements over past 2 decades: • GNI per capita more than doubled, • Poverty rate has been reduced significantly, and • Access to education and to healthcare has become universally available. By 1996, enrollment at primary schools was 97 percent for boys and 91 percent for girls. • By 2014, the average life expectancy in Algeria had reached 76.4 years; • but… • …heavy dependence on oil and gas revenues: 95% of exports earnings come from oil and gas • …Still high unemployment, especially among the youth (over 28%) • “Rich country with poor people” • Franchising can help address Algeria’s challenges Aliouche, Bonet-Fernandez, Guechtouli, Guechtouli - IRMBAM 2018

  4. II. Franchising as Economic Engine in Emerging Countries (1) • Franchising: Widespread business model that revolutionized economies of both economically developed as well as emerging countries • In United States (2016): • 20.8 million jobs (direct and indirect) • $1.3 trillion contribution to GDP • 732,000 franchised establishments,… • Franchising: • “a viable method of distributing goods and services which can have a positive influence on economic development” (Mendelsohn, 1992) • Effective model for economic development and international integration in developing countries (Alon, 2014) • “… can help the growth of small and medium enterprises.” (US Dept of Commerce, 1997) • “…is a particularly valuable strategy in developing countries to build a services economy” (Binh and Terry 2014). Aliouche, Bonet-Fernandez, Guechtouli, Guechtouli - IRMBAM 2018

  5. II. Franchising as Economic Engine in Emerging Countries (2) • Two major form of franchising: • Product and trade name franchising: • Soft drinks (Coca-Cola,…), automobiles (Toyota,…), gasoline (Shell,…) • Business format franchising – more involved model • McDonald’s, Accor, Luxotica,… • Now the more dominant model in economically developed countries • Entrepreneurial business can grow: • By building and operating its own units, or • Through franchising: faster growth, requires less resources, mitigates agency problems • Budding entrepreneur can: • Start her/his own business venture as an independent business, or • Join established network as a franchisee • Benefits as franchisee: • “go into business for him/herself but not by him/herself” • Use of established brand • Join proven concept • Technical and managerial support from franchisor, … Aliouche, Bonet-Fernandez, Guechtouli, Guechtouli - IRMBAM 2018

  6. II. Franchising as Economic Engine in Emerging Countries (3) • Besides the currently dominant franchise models (product/trade name, and business format), other forms of franchising have also been developed: • Tandem franchising: a form of “cooperative entrepreneurship” that helps individuals from disadvantaged backgrounds become franchisees through funding and mentoring programs (du Toit 2007, Hoy and Shane 1996); • Microfranchising:a form of franchising on a small scale that requires much lower costs; • Social franchising:franchising with a social purpose. It applies franchising principles to achieve social objectives (Aliouche and Schlentrich 2015); • Community franchising: a form of franchising where a community rather than an individual is the franchisee; • Flexible franchising: a form of franchising where franchisees have significant levels of autonomy; • Quasi-franchising: …the franchisee uses the proven franchise system’s back of the house functions, but does not use its front-of the house features such as the brand name and the unit design (Terry and Di Lernia 2013). Aliouche, Bonet-Fernandez, Guechtouli, Guechtouli - IRMBAM 2018

  7. III. Franchising Development in Algeria (1) • Franchising at micro level: • Helps business firms grow faster and more efficiently • Helps individual entrepreneurs to start new business with less risk, and with a support system • Franchising at macro level: • Helps a country with job creation, increased output of goods and services, economic modernization, infrastructure development, faster economic growth, development of entrepreneurial culture, development of entrepreneurial and managerial skills, business innovation, economic efficiency, labor force training, etc. (Alon 2004) • These potential impacts can have major benefits for Algeria’s quest for economic diversification, job creation and economic growth • Most attractive to Algeria: • Increased output of goods/services in non-oil and gas sectors (economic diversification), job creation, economic modernization, promotion of entrepreneurship, and acquisition of valuable skills (entrepreneurial, managerial, …) Aliouche, Bonet-Fernandez, Guechtouli, Guechtouli - IRMBAM 2018

  8. III. Franchising Development in Algeria (2) • Job creation and economic growth potential of franchising is well documented: • Pebble and Hoffman (1995), Alon and Welsh (2001), Welsh and Alon (2001), PwC (2016) • A study focusing on African countries found that each franchisor created on average 32 direct jobs per year (Siggelet al. 2003) • A 2003 IFA study found that franchising created sizable number of jobs in many emerging countries: • Korea: 530,000 • Brazil: 226,334 • Philippines: 100,000 • Malaysia: 80,000 • Algeria faced with serious youth unemployment challenges (Aliouche and Bonet-Fernandez 2017): 28.4 percent in 2014 • As in above countries, development of franchising in Algeria can help create substantial numbers of jobs for the youth and others • This employment and incomes can spur additional domestic demand for goods and services, further promoting economic growth, mostly in non-oil and non-gas sectors Aliouche, Bonet-Fernandez, Guechtouli, Guechtouli - IRMBAM 2018

  9. III. Franchising Development in Algeria (3) • In emerging countries, franchising usually grows through implantation of international franchisors, and then the development of local franchise systems (Aliouche et al., 2015). • International franchisors bring world class quality standards, business methods, and infrastructure • Algerian businesses and entrepreneurs will be motivated to learn and adopt these quality standards and business methods • This will raise the efficiency and competitiveness of Algerian franchisors, franchisees, other businesses and entrepreneurs, managers and employees – thus benefitting the whole economy Aliouche, Bonet-Fernandez, Guechtouli, Guechtouli - IRMBAM 2018

  10. III. Franchising Development in Algeria (4) • A major benefit of franchising is its capacity to encourage local entrepreneurship and to develop small and medium-sized enterprises (SMEs): • Franchisees are essentially entrepreneurs – their businesses are SMEs • Franchising provides individuals the opportunity to own their own business • Franchising allowed the emergence of large numbers of local franchisors and franchisees (IFA 2013): • S. Korea: 1,300 franchisors and 120,000 franchisees • Brazil: 894 franchisors and 46,536 franchisees • Philippines: 500 franchisors and 4,000 franchisees • Malaysia: 225 franchisors and 6,000 franchisees, etc. • Given appropriate encouragement, significant numbers of local franchisors and franchisees could emerge in Algeria, helping to spread the entrepreneurial culture and entrepreneurial skills in non-oil and non-gas industries Aliouche, Bonet-Fernandez, Guechtouli, Guechtouli - IRMBAM 2018

  11. III. Franchising Development in Algeria (5) • The development of franchising in an emerging country can help improve the quality of its work force: • Franchisors generally provide training to local franchisees and their employees • International franchisors may also transfer operative, investment, and innovative capabilities, as well as other resources and knowledge to franchisees and employees (Stanworth et al. 2001, Alon 2004) • Local franchisees and employees (as well as other local businesses and entrepreneurs) learn from international franchisors, and thus improving their skills and businesses. • The development of franchising may thus help Algerian franchisees, franchisors, other entrepreneurs and businesses and employees raise their skill levels as well as their productivity and competitiveness. Aliouche, Bonet-Fernandez, Guechtouli, Guechtouli - IRMBAM 2018

  12. IV. Has Franchising Fulfilled its Promise in Algeria?Current Situation of Franchising in Algeria • Academic literature on franchising in Algeria is scant at best • Conclusion of extant academic research: franchising is woefully underdeveloped in Algeria • Algeria lags far behind its immediate neighbors Morocco and Tunisia • Start of franchising: in 2003 in Algeria (1933 in Tunisia; 1962 in Morocco) • By 2013: only 29 franchise brands present in Algeria (Morocco: 440; Tunisia: 150) Aliouche, Bonet-Fernandez, Guechtouli, Guechtouli - IRMBAM 2018

  13. Field Study in Algeria • Field study conducted in Algeria to confirm academic research and identify actual factors impeding development of franchising in Algeria • Exploratory approach at this point as franchise information in Algeria is very scarce • Interviews with ten (10) franchise experts and managers in Algeria (April-September 2018) • Three themes: • Specificities of Algerian context regarding franchising • Algerian franchisees and their motivations • Difficulties faced by franchisors and franchisees to settle and/or stay in Algeria Aliouche, Bonet-Fernandez, Guechtouli, Guechtouli - IRMBAM 2018

  14. Field Study in Algeria: Findings 1. Specificities of Algerian Context: hostile environment • No legal basis for the concept of commercial franchise in Algerian regulations • Entrepreneurs interested in foreign franchises are seen as “mere importers” • “The current banking system does not allow the transfer of money abroad… This makes the transfer of royalties very complicated” Aliouche, Bonet-Fernandez, Guechtouli, Guechtouli - IRMBAM 2018

  15. Field Study in Algeria: Findings 2. Algerian Franchisees and their Motivations • International franchises present in Algeria today are mainly in: • Textiles: Sergent Major, 123, Promod,… • Catering: Pizza Hut, Noor El Hani,… • Luxury goods: Mauboussin, Gottfied,… • Most franchisees turned to franchising mainly by opportunism or cooptation Aliouche, Bonet-Fernandez, Guechtouli, Guechtouli - IRMBAM 2018

  16. Field Study in Algeria: Findings 3. Obstacles to Franchising: • Recurring issue: royalties payments • Impossibility to legally pay royalties to foreign franchisors • Now circumvented (legally) through various means: extra billing, … • Impacts directly only foreign franchises – issue has helped the emergence of Algerian franchises: Techno (office supplies), Noor El Hani (catering), BKL Industries (carpentry), etc. Aliouche, Bonet-Fernandez, Guechtouli, Guechtouli - IRMBAM 2018

  17. Field Study in Algeria: Findings 3. Obstacles to Franchising: • Customs duties and procedures • Impact negatively both foreign and domestic franchise systems • Frequent changes in customs regulations • Administrative delays in import procedures • Political and Economic climate • Negative country image (terrorism in 1990s,…) • “Not as touristy as its neighboring countries”,… • Lack of quality commercial premises • Weak protection of tenants from property owners • Difficulties of obtaining bank financing,… Aliouche, Bonet-Fernandez, Guechtouli, Guechtouli - IRMBAM 2018

  18. Field Study in Algeria: Recommendations (1) • Establish franchise association to educate policymakers, business people, and general public on franchising a. Help dispel negative perceptions of franchising b. Promote potential benefits of franchising: job creation, diversification,.. c. Relate clearly to development of entrepreneurship -“Franchising is the epitome of entrepreneurship” – Bill Rosenberg d. Source of reliable franchise information, etc. • Seek policymakers’ support of franchising development • Help develop laws and regulations specific to franchising • Promote less restrictive business laws and business practices: 1. Do away with the 49% foreign ownership rule, 2. Facilitate royalty transfers, 3. Lighten up customs regulations and practices 4. Improve protection of business tenants rights, etc. Aliouche, Bonet-Fernandez, Guechtouli, Guechtouli - IRMBAM 2018

  19. Field Study in Algeria: Recommendations (2) c. Improve availability of commercial real estate; d. Improve availability of financing for franchised businesses; etc. 3. Improve Algeria’s image as “safe country that is open for business” • Algeria still seen as unsafe country due to terrorism in the 1990s • Promote business-friendly laws and regulations; reduce bureaucratic hurdles,… • Promote international tourism (as do most of its neighbors) Aliouche, Bonet-Fernandez, Guechtouli, Guechtouli - IRMBAM 2018

  20. Conclusions • Work in progress – first draft • Much work remains: • Increase number of franchise practitioners surveyed • Update/complete franchise data in Algeria: -currently franchise data very incomplete and of poor quality 3. Share study/findings with stakeholders: franchise professionals, entrepreneurs, policymakers, educational institutions, etc. Aliouche, Bonet-Fernandez, Guechtouli, Guechtouli - IRMBAM 2018

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