1. Introduction and Methodology
Table 1: Estimated General Penetration
The Lebanese Franchise Association (LFA) is a non-profit organization that develops, promotes and protects the franchising sector in Lebanon. The LFA comprises franchisors, franchisees, and Associate franchisors. Associate members are franchisor candidates working towards fulfilling their membership requirements namely setting up a franchise structure and achieving their first franchise sales transaction. Other LFA members are the “College of Experts” with firms providing legal, marketing, franchising and other pertinent consulting services.
Type Franchisor Franchisee Total
The Project “Capacity Building at the Lebanese Franchise Association (LFA)” has been funded by the EU delegation in Lebanon and contracted to the consortium TRANSTEC/EQUINOCCIO/SEQUA. The general objective of the Project is “To enhance the perspectives of socio-economic development in Lebanon through the strengthening of its private sector.” More specifically, the Project provides support to the LFA in institutional capacity building, in undertaking a survey of the franchising industry, and in developing capacities of selected SMEs operating in the franchising sector. Within the Project, the consortium TRANSTEC/EQUINOCCIO/SEQUA designed the Survey of the Lebanese Franchising Industry to meet the following objectives: • • •
Gather up to date information about the Lebanese franchising industry. Estimate the franchise sector contribution to the Lebanese economy’s GDP and employment. Provide information about franchisors and franchisees, barriers for expansion, constraints, revenue and profitability, regional reach, and outlook for the future.
Type Franchisors Franchisees Total
Sample Distribution 91 109 200
Number of Concepts in Sample** 138 162 300
Average Number of concepts by Company in Sample 1.52 1.47
Estimated Number of Companies in Franchise Universe 299 445 744
Estimated Number of Concepts in Franchise Universe 453 652 1,105
*Weighted by sector **The average number of concepts was multiplied by the number of companies in the franchise universe to reach the total number of concepts in the franchise universe
2. The Franchising Industry in Lebanon Franchising companies are estimated to constitute around 6% of total companies operating in Lebanon. The franchising universe is estimated to comprise around a thousand one hundred franchise concepts. There are approximately 744 companies in the franchising sector operating in Lebanon. The industry contributes close to 1.5 billion U.S. dollars to the national economy, or about four percent of the entire GDP. Table 3: Key Indicators (Rounded Figures) Estimated Penetration rate of franchising activity in Lebanon Estimated Total Franchise Concepts in Lebanon Estimated Overall Franchise Units (POS) in Lebanon Estimated Contribution to Lebanese GDP in USD Estimated Contribution to Lebanese GDP in Percent
Estimated Penetration in Franchising 42% 58% 100%
Table 2: Estimated Number of Concepts*
The survey was subcontracted to InfoPro to undertake the fieldwork, data analysis and report writing under the supervision of the consortium. InfoPro proceeded in three stages, namely desk research using its data base of around 11 thousand companies, company screening of around 1300 companies, and face-to-face interviews with 200 companies, of which around 50% were located in Beirut and Mount Lebanon and the balance distributed over the rest of the Lebanese regions. The 200 companies interviewed in the second half of 2013were divided into 91 franchisors and 109 franchisee companies. The companies were distributed over the following sectors: retail, restaurant, services, hotels, education and entertainment, department stores & hypermarkets, gas stations, automotive, beverages and others.
Estimated Penetration in Overall Population 2.5% 3.5% 6.0%
6% 1,100 5,500 1.5bn 4%
Estimated Total Employees Working within the franchise industry in Lebanon Estimated Total Lebanese Franchisor Concepts Estimated Total Franchisee Concepts Estimated Total Lebanese Franchisor Units (POS) in Lebanon Estimated Total Franchisee Units (POS) in Lebanon Percentage of franchisees of Foreign Franchisor concepts in sample Percentage of franchisees of Lebanese Franchisors concepts in sample Percentage of Lebanese Franchisors company owned units (POS) in export countries in sample Percentage of franchised units (POS) in export countries in sample Percentage of Lebanese franchisors company owned units closures (POS-locally and abroad) in sample Percentage of Lebanese franchisors contract terminations (locally and abroad) in sample Percentage of Lebanese franchisors having franchise related litigations in sample
Around 44% of franchisees’ concepts available in Lebanon originated from Europe, 38% from the USA and Canada and 13% were created locally by Lebanese franchisors.
99,000 450 650 2,400 3,100 86%
of Origin of Franchisor Surveyed Country Franchisees: The Franchisors’ Origin Asia 9%
Gulf and Middle East Other 4% 2%
Europe 44%
Lebanon 13%
14% 13%
USA and Canada 28%
87% 9%
3%
11%
Base: 109 Single Response
3. Motivations of Being a Franchisor and a Franchisee The franchising sector employs nearly a hundred thousand people, or an estimated nine percent of workers in the country.
Surveyed franchisors indicated that they decided to turn to franchising because it provides additional sources of revenue and notoriety, facilitiates expansion, spreads business risk, and enhances business image, among others.
Table 4: Estimated Employment in the Franchising sector Franchisors Full Timers Number of Companies in Franchise Universe Estimated Franchising Industry Total
Part timers
299
Franchisees Full Timers
Part timers
445
45,051 15,806 31,000
Benefits of Being a Franchisor
Total
1%
No clear benefits
6%
Protect and organize brand expansion
7%
I have control over my line and quality of my products
744
8%
Higher expectations of quality by franchisees and customers
10%
Appearing to be larger in size (or part of a chain)
7,585 99,443
18%
Better business image
20%
Possibility of expanding anywhere we want
Franchisor Full-time Base: 88 -Franchisor Part-time Base: 27 -Franchisee Full-time Base: 108 -Franchisee Part -time Base: 30 Single Response
Enjoying more sources of revenues
45%
Rapid fame and notoriety
45% 0%
Base: 91 - Multiple Responses
5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
30%
Ease of expansion and spreading of business risks
For franchisees, the benefits of being in the franchise business include benefiting from the success of an established brand, benefiting from franchisor technical assistance, and being his/her own boss, to name a few.
Almost all franchisors have websites and most of them provide Facebook pages. However, only up to 73% have a dedicated section on their website for franchise opportunities.
Benefits of Being a Franchisee
Franchisors' Online Presence versus Total Number of Units
3%
Other
100%
4%
No clear benefits
50% 18%
I am my own boss
40%
20%
Can increase revenue depending on my own productivity
30%
21%
Benefit from the brand recognition and success
20%
Base: 109
0%
36%
Benefit from the success of others
10%
33%
The franchisor is always there to assist me
0%
5%
10%
15%
54%
60%
11%
Appearing to be larger in size (or part of a chain)
67%
70%
10%
I benefit from the exclusivity in the franchise agreement
94%
91%
73%
80%
7%
Higher expectations of quality by customers
85%
90%
6%
Work with international / high standards set by Franchisor
100%
90%
100%
20%
25%
30%
35%
40%
Has a website
Has a clear “franchise opportunities” section
Up to 5 Units
Multiple Responses
5 to 14 Units
Has a Facebook page Over 15 Units
Base: 64
Single Response
4. Source of Franchise Leads Franchisees indicated that they were introduced to the franchise concept by visiting a franchise store and through word of mouth or a friend in most cases. A minority indicated online search, exhibitions, market research, and magazine articles as other sources.
Franchisors indicated that the main source of franchise sales leads is online search, word of mouth, exhibitions and a strong brand that lets franchisees seek them out. Some depend on PR, referrals and brokers to a minor extent. Franchisors Main Source for Franchise Leads
Method of Introduction of the Surveyed Franchisee to the Franchise
4%
Do not know / Refused
5%
None
5%
Brokers
8%
Franchise outlet referrals
9%
PR
15%
20%
5% 6% 8% 30% 35%
By visiting a franchise store
25%
0%
PR includes magazine and newspapers articles / TV appearances
5%
10%
15%
20%
25%
30%
35%
Base: 109 - Multiple Responses
Base: 91 - Single Response
3%
A friend/word of mouth
21%
Online search
10%
The franchisor is a relative/family member
Well known brand
16%
Word of mouth
5%
3%
Internet search
11%
Exhibitions
Market research
An exhibition
10%
Franchisees seek us out
0%
1%
A magazine, an article, or brochure
4%
My own website / facebook
5%
Other
2%
Acquaintances
4%
Do not know
5%
Others
5. Franchise Contracts
Type of Franchise Rights Offered by Lebanese Franchisors Abroad
Most of the interviewed franchisees are granted the largest possible leeway by their franchisors (mostly international companies) under the franchise agreement. Lebanese franchisors appear more restrictive by comparison, since they more often grant area development or single unit rights. The automotive sector is structured differently in that its franchisees operate under exclusive agreements with their franchisors.
2%
Do not know
1%
Others (Mixed strategies)
13%
No fixed strategy: You decide on case by case basis
26%
Master rights (with opportunity to sub-‐franchise)
Around 46% of franchisors indicated that it normally takes them one to three months to sign a franchise contract with a franchisee. Another 19% indicated that it takes them 4 to 6 months.
27%
Single Units rights
30%
Area development rights
Surveyed franchisors said that they charge average initial franchise fees of USD 55,000 for Lebanon and USD184,000 for markets abroad. Their royalty fees range between 5 and 5.5% and their marketing fees around 2% of sakes. Franchisees identified much higher fees, probably as most are paid to international franchisors.
0%
5%
10%
15%
20%
25%
30%
Base: 78
Multiple Responses
Franchisees: Type of Franchise Agreement
Lebanon Type of fees
Mean
Franchise fees (’000 USD)
55.0
18
184.4
4.9
Marketing fees (% of sales per month)
1.9
16%
Area development rights in Lebanon (multiple stores)
49
Master rights for Lebanon only (with opportunity to sub-‐ franchise)
5.4 19
14%
Exclusive importer -‐ Dealer
37
26
Royalty fees (% of sales per month)
9%
Single Units rights in Lebanon (one store)
Number of respondents
Mean
4%
Don’t know
Abroad
Number of respondents
5%
Refused
Table 5: Franchise Fees Charged by Surveyed Franchisors
24%
Master rights for Lebanon and other countries (with opportunity to sub-‐franchise)
26
0%
2.1
32% 5%
10%
15%
20%
25%
30%
35%
Base: 109
Table 6: Franchise Fees Paid by Surveyed Franchisees Type of fees Franchise fees (’000 USD)
6. International Markets
Number of respondents
Mean 156.9
20
Royalty fees (Percentage of sales per month)
9.2
33
Marketing fees (Percentage of sales per month)
4.0
10
Franchising is the preferred growth strategy abroad while franchisors prefer to run company owned units in Lebanon in general. Some 51 percent of local franchisors have franchised operations abroad, and 38 percent run companyowned operations outside of Lebanon.
Multiple Responses
The main export countries for surveyed franchisors are located in the Gulf and the Middle East, namely, Dubai and Abu Dhabi in the UAE, followed by Riyadh and Jeddah in the KSA, Doha in Qatar, Erbil and Baghdad in Iraq, as well as Paris and London.
Level of Investment Needed to Launch One Franchise Unit 35%
32%
31%
30%
USA/ Canada Africa 3% Europe 4% Jordan 3% 4%
25% 20%
17% 17%
15%
Others 7%
12% 10%
KSA 24%
10%
6%
4%
0% UAE 19%
Qatar 10%
Less than $250,000
$250,000 to $500,000
$501,000 to $750,000
$751,000 to $1,000,000
Franchisor
Kuwait 14%
5% 3%
$1,001,000 to $1,500,000
More than $1,500,000
Refused / Do not know
Franchisee
Franchisor Base: 91
Franchisee Base: 109 Single Response
8%
7%
5%
Egypt 4% Oman 3%
Bahrain 5%
25%
25%
Franchisors’ Export Countries Distribution of Concepts
Franchisees' Means of Financing their Franchise Business
Base: 91 Multiple Responses
4%
Do not know/ Refused
7. Challenges
2%
Support/budget from the parent company
For franchisors and franchisees, security conditions, the high cost of operations (mostly rent), and difficulty to access financing are the strongest barriers to developing the business in Lebanon. Complex government regulations, the lack of qualified employees, and employees’ high turnover and high costs were also named as obstacles.
5%
SME loan
10%
Partnership
38%
Bank Loan
73%
Personal money
Moreover, obstacles to expanding to other countries include poor economic conditions, restrictive legislation, high marketing expenses, and the shortage in franchising exhibitions.
0%
20%
30%
40%
50%
60%
70%
80%
Base: 109 Multiple Responses
The average investment for opening a franchise in Lebanon is around USD 500000 (excluding franchise fees). Franchisors have better access to third party financing than franchisees, whereas franchisees rely mostly on equity to finance their expansion.
In reality, when a franchisor does not grant franchise rights to a prospect franchisee, its mostly because the prospect does not have sufficient capital, does not have a proper location in the target market, lacks experience and confidence, did not provide a business plan and performed poorly in interview, among others.
Potential franchisees are rejected by franchisors mainly because of lack of capital and/ or lack of expertise in the sector.
10%
As far as the employer-employee relationship is concerned, the surveyed franchisors were mostly concerned with the lack of qualified employees and high employee turnover.
Franchisors' Reasons for Not Granting a Franchise 2%
Refused / Do not know
Others
5%
No specific reason
5%
Franchisors' Concerns With Their Employees
2%
Franchisor not ready yet to sell the franchise
3%
Difference in visions
6%
Lack of transparency
13%
Franchisee lacking the reputation and image required
19%
Lack of experience / qualifications
23%
No proper locations in target market
23%
15%
20%
25%
30%
35%
13%
Continuous salary adjustments
35% 10%
6%
Theft
Insufficient capital 5%
5%
Lack of team work and re-‐training of employees
Lack of self-‐confidence
0%
4%
Lack of employees with flexible work hours
18%
Did not provide a business plan
3%
Obtaining permits for foreign employees
14%
Poor performance of prospect at interview
7%
Others
8%
Inability to maintain standards
19%
No concern with managing my employees
7%
Not serious candidates / lack of commitment
16%
High cost of labor
40%
17%
Cost and complexity of registration process at social security
Base: 91 Multiple Responses
22%
High employee turnover
33%
Lack of qualified employees 0%
Franchisors generated an average number of 14 leads per company per year, which is very low considering than only 2 to 3 percent of leads close deals. Franchisors indicated that they need to improve their marketing efforts. Also Less than half of surveyed franchisors have a franchise support team to help international franchised units, which is a shortcoming. Areas of Franchisor's Business That Need Improvement 9%
Others 2%
Operations
3%
Production
4%
Accounting
4%
R & D
11%
IT
14%
HR/ Training
25%
30%
35%
Base: 91 Multiple Responses
8. Current Profitability and Future Growth Prospects
27%
Marketing 0%
5%
10%
15%
20%
25%
30%
Base: 109 Multiple Responses
20%
20%
Franchise Sales
15%
Franchisors’ sales from company owned operations ranged from less than USD 250,000 (9%) to more than USD 5mn (12%). The highest percentage (18%) belonged to franchisors generating revenue ranging between USD 250,000 and USD 750,000 from their company owned operations. Thirty percent of franchisors did not provide an answer.
4%
Sales
10%
Around 22% of franchisees declared that their annual sales exceed USD2mn and 11% indicated a sales level of USD1 to 2mn, the rest either identified a lower level of sales or declined to answer (higher sales brackets were noticed in car franchisees).
22%
No specific area
5%
Profitability of Franchisors and Franchisees in 2012
Franchisors' Total Annual Sales Range in Lebanon from Company-‐Owned Operations in 2012 (USD)
42%
45%
30% 30%
40% 34%
35%
25%
30% 18%
20%
12%
12%
15%
10%
9%
8%
Less than $250,000
$250,000 to $749,000
$750,000 to $1,499,000
$1,500,000 to $2,500,000 to $2,500,000 $4,999,000
More than $5,000,000
13%
11%
High losses
Marginal losses
Breaking even
Marginal profits
Refused
Franchisor
Base: 91 - Single Response
6%
5%
3%
5% 0%
10%
8%
10%
5%
0%
19%
20%
15%
10%
22% 22%
25%
High profits
Refused / Do not know
Franchisee
Franchisor Base: 91 Franchisee Base: 109 Single Response
In 2013, 79 franchises were sold by surveyed franchisors compared to 21 contract terminations. Around four closures are estimated to take place in the next year by franchisors and ten closures by franchisees, mainly in the retail sector.
Franchisors' and Franchisees' Level of Confidence in the General Lebanese Economy in the Next 12 Months
Most franchisors and franchisees reported marginal profits or breaking even in 2012. Franchisors were generally more profitable than franchisees, especially those with more than five units. Three out of five franchisees were breaking even or making profits.
56% 60%
55%
50% 35%
For around 60 percent of franchisors and franchisees, the turnover for the first half of 2013 was beneath their earlier expectations. Around half of the franchisors and franchisees estimated that turnover for the second half of 2013 will either be stable or show a moderate decline. Not surprisingly, around 55% of franchisors and franchisees reflected negative level of confidence in the Lebanese economy within the next 12 months following the survey followed by around 38% that said they are only somewhat confident.
38%
40%
30% 20% 3%
10% 0%
Not confident at all
Somewhat confident Franchisor
6%
Fully confident
Franchisee
Franchisor Base: 91 Franchisee Base: 109 Single Response
9. LFA Membership and Expected Role LFA membership is more common among franchisors than among franchisees. Close to half of the surveyed franchisors are LFA members vs. only 30% of surveyed franchisees. Among franchisors as well as franchisees, restaurant chains are more likely to be LFA members than retailers, and also more interested in joining. Among the 15 franchisees that were interviewed in the automotive sector, there was not a single LFA member. Four wished to join, five declined, and six were not sure. For franchisees, the main reason for not being a member of the LFA is a lack of awareness of LFA services. For both franchisors and franchisees, the current most beneficial service of the LFA is the organization of networking events. For franchisors, the most important services LFA could offer include assistance in prospecting, the introduction of their brand to markets abroad, and providing franchise awareness, technical assistance and training.
Most Important Service the LFA Could Provide to Franchisors in the Future 5%
Others
8%
Lobbying
12%
Increase Awareness of Franchising
15%
Provide Networking Opportunities
25%
Provide Support, Training and Advice
34%
Prospecting & Opening New Franchise Opportunities Abroad 0%
5%
10%
15%
20%
25%
30%
35%
Base: 58
Multiple Responses - Compiled