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Procedia - Social and Behavioral Sciences 130 (2014) 193 203

INCOMaR 2013

Global Franchising Operational Issues


Jaishree Asarpota*
Higher Colleges of Technology, PO Box 16062, Dubai, United Arab Emirates

Abstract
This research paper explores the operational issues of international retail franchising that need to be
implemented by franchisor/franchisee in their joint efforts of globalization. The paper discusses the emphasis
given to the power and control mechanisms available to the franchisor to control and co-ordinate with the
international franchisee. The paper takes a theoretical approach to the relationship building process in
international retail franchising, and it addresses the importance of retail franchising in the Middle East, with
special emphasis on the United Arab Emirates.
2014
2014 The
Ltd.
Open access under CC BY-NC-ND license.

The Authors.
Authors.Published
PublishedbybyElsevier
Elsevier
Ltd.
Selection
and
peer-review
under
responsibility
of
thethe
Organizing
Committee
of INCOMaR
2013.2013.
Selection and peer-review under responsibility of
Organizing
Committee
of INCOMaR
Keywords:

1.

franchising; retail; United Arab Emirates; international; power

Introduction

Retail companies have a selection of market entry modes such as exporting, licensing,
franchising, joint ventures, and partly or wholly owned direct investments (McGoldrick & Davies,
1995). Organizations who have mission statements to expand their business and make their brand
known on an international level may choose franchising which has proven to be a popular mode of
entry (Burt, 1993). Recent trends show that businesses are employing franchising as an
international marketing strategy, especially in geographically distant markets. The term
franchising describes a wide variety of business activities, but the contemporary franchise system

* Corresponding author. Tel.: +042089472


address: jaishree.asarpota@hct.ac.ae

1877-0428 2014 The Authors. Published by Elsevier Ltd. Open access under CC BY-NC-ND license.
Selection and peer-review under responsibility of the Organizing Committee of INCOMaR 2013.
doi:10.1016/j.sbspro.2014.04.024

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Jaishree Asarpota / Procedia - Social and Behavioral Sciences 130 (2014) 193 203

commonly in use is referred to as business format franchising (Petersen & Welsh, 2000). Business
format franchising is widely recognized as an established global trend when organizations want to
expand their business. Business format franchising may be defined as, the granting of a license for
a predetermined financial return by a franchising company (the franchisor) to its franchisees,
entitling them to make use of a complete business package, including training, support and the
corporate name, thus enabling them to operate their own business to exactly the same standards
and format as the other units in the franchised chain. ((Grant, 1985, p 4)
2.

Literature Review

In practice, international retailers are increasingly using franchising as a mode of operation in


foreign markets and gradually though still relatively limited in its scale and scope, the research
community has begun to examine international franchising within the context of retailer
internationalization (Sanghavi, 1991; Quinn 1998, 1999; Doherty & Quinn, 1999; Quinn &
Alexander 2002). Research on the internationalization of franchising has explored four main
themes: motivations to franchise (Welch, 1990); methods of international franchising; the extent
and direction of international activity (McIntyre & Huszagh, 1995) and operational issues
(McIntyre et al. 1991; Yavas, 1998). The fourth theme, the operational issues involved in
international franchising which examines control, support and adaptation issues, particularly that
referring to how international franchisors control their international operations is of greatest
relevance behind the literature review of this paper. The paper discusses the operational issues
that may lead to the success or failure of international retail franchising partnership. Below
mentioned is the proposed franchising model for implementation of globalization of products and
services into international markets.
2.1. The agency theory
Doherty and Quinn (1999) contend that the franchisor-franchisee relationship parallels that of
the principal-agent relationship. A fundamental aspect of the principal-agent relationship is the
contract between the parties, the agent is responsible to protect the interests of the principal and is
responsible to ensure that the knowledge he gains through the agency contract will be protected and
not used against the interests of the principal. The international retail-franchisor-franchisee
relationship embodies the principal-agent model and meets Eisenhardts (1989) requirements for a
useful application of agency theory, that is, the two parties are independent and co-operative yet
rationally may pursue different, even contradictory goals (Lasser & Kerr, 1997).
Academic researchers such as Quinn (1999) attempt to see if the domestic contract issued for
local partners in relation to agency theory can be applied to international retail franchise
agreements, and the evidence has not been conclusive. The agency theory dictates the need to have
a binding contract and the firms willingness to enforce the contract. The nature of support
activities provided by the organization to their agency partners are very clearly identified, agency
theory also advocates the need for coercive sources of power. Agency theory also believes that the
contract can be enforced if there is a presence of a well-defined product concept and service.
Agency theory advocates coercive sources of power to control franchisee behavior (Doherty &
Quinn, 1999; Quinn & Doherty, 2000). Based on the principal-agent relationship where one party
(the principal) delegates work to another party (the agent) who performs the work on a daily basis,
agency theory has been applied successfully to domestic franchising (Rubin, 1978, Mathewson &
Winter, 1985), but there is no conclusive evidence on the power and control mechanisms used in
international retail franchising.

Jaishree Asarpota / Procedia - Social and Behavioral Sciences 130 (2014) 193 203

Retail Franchising

Agency Theory
(Domestic)
Franchising)

International
Retail Franchising

Operational Issue
Power

Operational Issue
Control

Coercive power

Master Area
Franchising

Reward Power

Franchise Partner
Selection

Legitimate Power

Expert Power

Referent Power
(Information)
Fig. 1. Proposed Model for international retail franchising

2.1.1

Operational Issue Power

French and Raven (1958) taxonomy of power remains both relevant and is still prevalent in
franchising research. Academics agreed that the different forces of power influence international
franchising agreements and the five forces of power as described by French and Raven are coercive
power, reward power, legitimate power, expert power and information power. The below diagram
is a proposed model that explains the relationship, as developed by the author, to understand the
implications of the franchisor/franchisee relationship:

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Table 1. Taxonomy of Power and the Franchisor/Franchisee Relationship


Franchisor/Franchisee Partnership
French and Raven
Taxonomy of Power
(1958)
Coercive Power(threat of
Non-coercive channels of power may be more effective
punishment)

References

Quinn & Doherty,2000


Moore & Birtwistle, 2004
Falbe & Dandrige, 1991
Doherty & Quinn 1999

Reward
Power(compliance with
promise of reward)
Legitimate
Power(authority)

Profit is the underlying motive.

Expert power(superior
knowledge)

Information asymmetry may arise as a result of


differences in economic development, cultural practice
and regulatory environments which may mean that the
agent (franchisee) has more information about
operations in a foreign market than the principal
(franchisor)

Doherty, 1999

Referent
power(compliance
through pursuit of mutual
interests)

Effective channel communications improves level of


satisfaction and cooperations among members and
ultimately improves channel efficiency and
effectiveness

Dwyer, 1980

2.1.2

Legal contract between the franchisor and franchisee.

Coercive Power

Quinn (1999) adopted a qualitative, ethnographic approach to explore how one natural
cosmetics company attempted to control and support its international franchise network. He found
that coercive sources of power were primarily used to influence franchisee behavior and thus
enhance control. A high level of conflict was observable, not because the franchisor was exerting
excessive power but because franchisees were dissatisfied with the quantity and quality of support
received. Quinn also noted that this company was a small company hence the reason for the
difficulties in maintaining control of its international franchise business. Quinn & Doherty (2000)
conclude that while the marketing channels literature acknowledges both coercive and non-coercive
sources of power are available, there is in general a consensus that non-coercive power are more
readily used to influence franchisee behavior and enhance control.
Moore and Birtwistle (2004) wrote that the use of coercive power, for international fashion
retailers operating in the UK, was being replaced with non-coercive power, recognizing that the use
of coercive power may be detrimental to healthy channel relationships. Falbe and Dandrige (1991)
contend that as a franchisor expands his markets on an international scale, a coercive approach to
power becomes more difficult to maintain and over time non-coercive sources of power may come
to dominate the relationship. Successful relationships can be built on trust, mutual commitment
and support and this will allow the franchisor to avoid mitigating the use of coercive power, which
may not be effective if the bond of the contract is based only on the enforcement threat of the legal
terms and conditions.
2.1.3 Reward Power
The international retail-franchisor-franchisee has many advantages to all parties; firstly, the
agency theory incorporates realistic behavioral assumptions such as the presence of bounded
rationality, the potential for opportunism and goal conflict. These factors are also present in the
franchisor-franchisee relationship (Lassar & Kerr, 1997). Secondly, agency theory is appropriate

Jaishree Asarpota / Procedia - Social and Behavioral Sciences 130 (2014) 193 203

because it focuses on the economic motives operating within a relationship, that is, risks and
incentives (Lassar & Kerr, 1997). Thirdly is the emphasis on profit maximization through
intermediate product markets, that is, knowledge, technology and goodwill (intangible assets). In
international retail franchising, retail firms franchise their brand and store concept to franchisees in
return for a franchise fee and margin on the product sold within the stores
2.1.4

Legitimate Power

The franchise relationship starts with the franchise contract which outlines the terms and
conditions for the business or brand to be managed. In many ways the franchise contract can reflect
the level of development of the franchise operation and the more refined the contract, the more
experienced and in most cases, the more strategic the franchisor. In theory it would be assumed that
the franchise contract would have a particularly stabilizing influence on the relationship. In the dayto-day running of the relationship it is the ongoing and continuous communication and the support
provided by the franchisor to the franchisee that maintains the importance of the brand in the
region. Quinn and Doherty (2000) believe that franchise agreement is also affected by the
development of the franchise system, as well as other factors such as the stage of development of
the franchise system and the effects of company size also influence the nature of power and control.
2.1.5

Expert Power

Business to business situations provide a context where relationships are close, long-term
exhibit high levels of trust, commitment, mutuality, satisfaction, and co-operation (Dwyer, Schurr
& Oh, 1987; OMalley and Tynan, 2000). Doherty considers the franchisor-franchisee relationship
as one such business-to-business relationship where the partners possess the shared objectives of
nurturing a shared project in which both parties have vested interests to their own mutual benefit.
The international development of the brand requires stable relationships and an active involvement
in the marketing and protection of the international brand The presence of a defined retail brand
offer is an important consideration when it comes to the establishment of stable relationships.
Various support activities may be need by the franchisor/franchisee such as a franchise manual,
the business development plan, intensive support for the initial store opening, and initial advertising
support for the brand, celebrity endorsement, ongoing visits from the original franchise owner,
merchandise review, retail staff training and in some cases providing country managers from the
origin country. Other activities that may be included are monitoring of sales and other financial
data but overall there are no set rules for the franchisor/franchisee. The need to support the brand
within a stable relationship was clearly important to retailers that had such a strong asset. Where the
brand was valued by both the franchisee and the franchisor a close relationship was valued and
more sustaining.

2.1.6

Referent Power (Information Power)

Grub (1972) highlighted that supporting and maintaining international franchisees is


considered particularly difficult and as a result the cost of providing franchise support is
consequently higher than originally anticipated. Academic researcher indicates that the provision
of a successful support system is crucial to the development of a successful international franchise
business and as a means to control the retail brand offer. Asset intangibility is a particular feature of
the retailing sector, with special emphasis given on the product brands, retail formats and
managerial technology, all of which are characteristic of embedded information (Doherty & Quinn,
1999). Agency theory in the international retail franchise context emphasizes the importance of the
information transfer process, information asymmetry problem and associated monitoring costs
(Doherty, 1998, 1999).

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The academic literature identified by Doherty and Alexander identified that in the UK, the
fashion retailers gave enormous support to their franchisees especially at the time of opening new
boutiques. The authors identified that step by step support was given in how to set up the store and
run the franchise business, since the initial opening of a store in an international location is crucial,
since the location has to be approved by the head office. The franchisor then dictated the design and
structure of the shop, which the franchisee has to pay for, and the brand image is ensured by the
product offerings. During the initial set-up operations, the franchisor helps the boutique store by
helping to select the merchandise and ensuring that the boutique has the latest collections otherwise
the brand image gets eroded. During these stages, depending on the size and support given by the
franchisor, the franchisor or head office provides training and other support to their franchisee. In a
way, it is important to the franchisor that its brand and the franchisee succeed in the host country. If
the product requires intensive training, it would be provided at the time of the store opening, either
by the staff visiting the country of origin, or in some cases, the training could be provided in the
host country.
2.2 Operational Issue Control
Walker and Cross (1989) identify control as a serious issue for concern for international
franchise firms. Sashi and Karuppur (2002) found that franchising enables the transfer of operating
responsibility to franchisees while permitting the franchisor to retain control. Mcintyre, Huszagh &
Huszagh (1991) report that perceptions amongst US franchisors indicate that they are able to
maintain the same level of control over international franchisees as they maintain over domestic
franchisees. The concept of control is complicated by the internationalization of the channel; retail
franchisors must realize the need to employ mechanisms that will help them promote the
franchisees and the use of the brand in disparate markets. Some of the mechanisms used for the
successful implementation of retail franchising are shown below.

Control Mechanisms in International


Retail Franchising

Control through franchise partner


selection

Control through Master/Area Franchising


Control through franchise partner
selection
V

Control via Area Franchising in the region

Control in selecting the right partner

Control in finding the right chemistry in


your partner

Control in building a relationship with


your partner

Fig.2 Operational issues assessment in international retail franchising

2.2.1

Control through Master/Area Franchising

The franchisor grants the master franchisee the right to sub franchise the franchisors concept
to others within an exclusive territory. The local partner is viewed not only as a source of finance
for the franchisor but also as a major source of information. The franchisor/franchisee agreement
highlights the importance of providing support to franchisees. In order to establish the
development of a successful franchise relationship, due diligence in the franchise partner selection

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and the use of master/area development franchising is needed in all stages of the
franchisor/franchisee partnership. Many retailers use the same master franchisee for their outlets
across the Gulf countries (Jones, 2003).
2.2.2

Control through franchise partner selection

Figure 3 highlights the steps that may be followed in the development of a partnership
development process for the franchisor/franchisee relationship to reach the stage of a successful
trustworthy relationship.
Fig. 3. Partnership development process (Doherty & Alexander, 2004)

Fig. 3. Partnership development process (Doherty & Alexander, 2004)

2.2.3

Control in selecting the right partner

Doherty and Alexander (2004) conducted research on the partner selection process and defined
it similar to a traditional marriage context. The marriage arrangement is preceded by a process of
the recognition of relationship need, a partner search process and the evaluation of potential
partners (Doherty et al. 2004). They further point out the importance to enshrine longevity and
mutual value systems to their relationship because it would be based on mutual benefits. The
findings also highlight the importance of chemistry of attraction and trust as important factors.
Dohertys findings have been criticized because of the marriage analogy by other researchers such
as Tynan (1997).
2.2.4

Control in finding the right chemistry in your partner

The shared project of managing, marketing and developing the retail brand in the international
market and the choice of the right partner determines whether the international retail franchising
partnership will be successful or not. The choice of the right partner avoids the need, in most cases,
to employ coercive power. The issue of trust evolves from the stage in the process whereby one
potential partner was chosen over another on the basis of empathy or chemistry between the
partners. This emphasizes that the day-to-day management of the relationship will occur as a result

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of support and communication and not the welding of a franchise contract. There is no scientific
method of how franchisors select their franchisees. Sometimes the chemistry and trust between
the franchisor and franchisee play a significant role in selection of the international franchisee
partners. Selecting and choosing the right franchisee partner requires skill and is a control element
that franchisors exert over their franchisees. The franchisors executive the selection process as an
important one because a long trustful relationship between the franchisor and franchisee can lead to
mutual benefits to both parties. In international franchisor relationships, selecting a right partner is
of utmost importance and therefore, many factors come into play when making the decision. In the
Middle East, relationships are important to franchisees (Jones, 2003).
2.2.5

Control in building a relationship with your partner

Building a successful franchise relationship from the beginning by choosing the right partner
through to the everyday communication with that partner via the functional areas of the business is
also pivotal to control. A franchise relationship is intended to be a long-term commitment where
communication and trust are central to its success. The centrality of trust in the franchise
relationship is crucial to its ongoing success and the development of a recognized partnership
which will benefit both parties. There is acknowledgement that if a franchisor really wants to
control and maintain uniformity of its brand(s) then it must be willing to invest the same kind of
time and energy it would invest in any other business relationship and see it very much as a longterm ongoing process of trust building and communication.
3.

The International Retail Expansion in the United Arab Emirates

The Middle East is growing in terms of retail importance (Frumkin, 2002), and there may be
several reasons for the phenomenal growth of the retail industry in the Middle East. The Middle
East was the home to five of the eight largest malls in the world in 2012. The Middle East & North
African (MENA) Franchise Association highlights that the franchise industry in the Middle East
and North Africa is worth over $30 billion; the annual growth of the Middle East franchising sector
is around 27% (www.menafranchise.assocation.org 2013)
The local newspaper, Gulf News,
2013, reports that in the United Arab Emirates, there are 850 local and international brands, which
are growing at a rate of 16 per cent year on year compared to regional markets. The annual
A.T.Kearney Global Retail Development Index (GRDI) ranks countries as to the attractiveness of
entry, the higher the ranking, the more urgency there is to enter the country. The United Arab
Emirates made the biggest jump in the Index in 2009, going from 20th in 2008 to 4th in 2009. The
recent GRDI scale of 2013 ranks the UAE as number 5, an increase of 2 places from 2012. It is
interesting to note that Dubai is considered an important market for international retailers, and is
competing with Brazil and China, who hold number 1 and number 4 positions respectively (GRDI,
2013).
3.1. Dubai - The Middle Easts Retail Capital City.
According to Mintel (2004), Dubai has succeeded in pitching itself as an all-year round luxury
getaway, in which extravagance is the norm. Thirty years ago, there was nothing in Dubai but a
creek, a Sheikhs palace (Yeoman & McMahon-Beattie, 2006) but today as a city state, the
extravagances of luxury are everywhere, for example, the worlds richest horse racing event takes
place in Dubai every year, the Dubai World Cup, Burj Khalifa, the worlds tallest tower, Dubai, the
worlds biggest mall (Balakrisnan, 2008). The table below highlights some of Dubais superlatives.

Jaishree Asarpota / Procedia - Social and Behavioral Sciences 130 (2014) 193 203

Table 2. Dubais superlatives


Media proclaimed 7 star Hotel

Burj Al Arab

Worlds tallest Building

Burj Al Khalifa

The Worlds richest horse race

The Dubai Cup

th

The self-proclaimed 8 wonder of the world

The Palm The World

Dubai Marina

Worlds largest man-made marina

The Worlds biggest Mall

Dubai Mall

The Worlds largest man-made port

Jebel Ali

Worlds largest gold souk

In Dubai Mall

Source: Balakrishnan (2008)

Dubais Shopping centres are now noticeable phenomena within the retail structure of Dubai,
and have had a serious impact upon the traditional retail system centred on the markets (souks). The
new centres have a unified architectural style; they are modern, western and air-conditioned. The
last of these features is of particular relevance to the increasing patronage in Dubai, where the
climate is severe most of the time. Factors such as economic prosperity, cultural differences, ethnic
mix and lifestyle changes, in addition to hot weather and humidity, have changed the consumers
shopping patterns from traditional marketplace souq to shopping centre (El-Adly, 2001). Many
international retailers have expanded their operations to the United Arab Emirates through
franchising agreements or partnerships, for example, Starbucks, McDonalds, Pizza Hut, H & M,
Marks & Spencer, Zara, Mango. There are also several examples of luxury brands that hold
flagship stores in Dubai such as Burberry, Channel, and Louis Vuitton. European retailers such as
IKEA have also penetrated the Middle Eastern market.
In 2006, the retail and wholesale industry contributed 16.6% GDP of Dubai was found from
wholesale and retail, and in the same year tourism contributed 23% of GDP of Dubai. The Dubai
Duty Free airport had over US $700 million per annum in 2006, and was third only after Heathrow
(London) and Incheon (Korea) (Retail ME, 2006b). In 2005, more than 30 per cent of the
population was in the 20-44 age range crucial for retail sales, and this is expected to hit 56 per cent
by 2015 (www.dubaievents.ae 2013). Dubai has become a hotbed for upscale retailers, with Prada
and Gucci recently signing joint ventures with Al Tayer Insignia to develop a retail network across
the Middle East (www.dubaievents.ae 2013).
There are 300 retail brands in the United Arab Emirates, with 80 new ones entering the market
between 2014 and 2015, and 80 service brands, according to the Franchise Development Services
(FDS) in the UK (www.gulfnews.com 2013). The UN describes 73 per cent of the United Arab
Emirates (UAE) population in 2005 as economically active, forecast to rise to 78.6 per cent by
2015. A.T. Kearneys 2011 Retail Apparel Index found that the United Arab Emirates had the
highest fashion clothing sales per capita per annum in the developing world, at $785. The report
attributed its success to high disposable income and immense fashion consciousness. The United
Arab Emirates retail sales are forecasted to grow from an estimated Dh113.87bn ($31.01bn) in
2011 to Dh151.36bn ($41.22bn) by 2015, as published in the Gulf News, 2013
Gulf investors are eager to bring outlets to the region and potential franchise partners tend to be
wealthy family-owned businesses (Martin, 1999). The great commercial families have large
financial resources and political clout and can ensure rapid spread of their partners brand through
the region (Young, 2001). This paper has highlighted the importance of the successful
development of the operations side of the franchisor/franchisee partnership; it has highlighted the
importance of the Middle East and Dubai, in particular and has identified the gap that exists in this
region.

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4.

Limitations

The purpose of this paper has been to highlight the importance of international retail
franchising, a subject which has as yet been under-researched. This study, while providing useful
and interesting information about international retail franchising is not without its limitations. The
findings highlight two key challenges that would require further investigation. First, the study
needs to be redefining to include more primary data from the retailers in Dubai, to identify the
reasons behind the international brands making their presence in the United Arab Emirates. It is
important to know whether they are profits behind the business decision or if this to create more
brand presence internationally. Secondly, the study should identify the rules and regulations
governing the franchising laws governing the country as these have still not been finalized and are
still under construction by the relevant authorities in the region. Future studies need to examine the
larger retail industries who are franchising targeting particular franchisees to understand the power
and control issues in the international retail franchising business. Progressive global retailers need
to be interviewed and more primary data collected for the Middle East, which would be still in its
empirical stage, since the region has been largely ignored. A quick glance at the academic and peer
reviewed journals show that the Middle East research only appears 8 times from 2004 to 2012.
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