JUNE 29, 2009

Franchising sector in Egypt receives financial boost

By Kendal Tyre

Franchising has developed quite extensively in Egypt over a short time, especially in the fast-food sector. In an effort to further boost that country’s franchising industry, the African Development Bank recently announced its financing of Egypt’s Franchising Sector Support Program with US$ 40 million. International franchisors should carefully consider the benefits that the program provides to expand their systems to Egypt.

Background

Currently, there are approximately 40 international franchisors operating in Egypt, including 25 food franchisors and 15 non-food franchisors, with hundreds of individual outlets.

The Egyptian fast-food market, dominated by U.S.-based franchisors, has experienced notable expansion since it began in the 1970s, and market sources expect the growth to continue at an annual rate of 10-20% over the coming years. The current food franchise market size is estimated at more than US$ 300 million. Some of the popular franchises include: Chili’s Grill & Bar, T.G.I.Friday’s, Hard Rock Café, KFC, Little Caesars, McDonald’s, Pizza Hut, and Baskin-Robbins. During the 1990s, non-food sectors started to develop and they now have a large market potential. A limited number of companies in the fields of hotel management, car rental, language education, health and fitness, electronics, and computer training are currently franchising in Egypt.

Egyptian Franchise Development Association (“EFDA”) represents and serves the franchise industry in Egypt. It promotes investments through franchising, encourages training, and quality control in franchise systems and works to solve common problems in the industry. The EFDA also sponsors an annual local franchise show.

African Development Bank initiative

The African Development Bank (“AfDB”) franchising initiative started in 2001-02 with the aim of raising awareness and capacity building for stakeholders in franchising in certain countries on the African continent. The initiative also creates business opportunities by linking franchisors in different countries and designing financial support mechanisms for franchisors and franchisees at the regional and country level. In Egypt, the AfDB initiative seeks to promote franchising as an effective business strategy for private sector development and small and medium enterprise (“SME”) growth.

Egypt’s proposed Franchising Sector Support Program (“Franchising Program”) will be financed by the AfDB and coordinated by the Social Fund for Development (“Fund”), a promoter of small enterprise development in Egypt. The Franchising Program will encourage the establishment and expansion of primarily local franchising concepts resulting in entrepreneurship development, economic growth, and job creation. The medium-term objective of the Franchising Program will be to establish solid local financial instruments and collaborative structures that address current gaps in the franchising market.

The project has two components: (i) debt financing through a senior loan of US$ 40 million from the AfDB to the Egyptian government, channeled through the Fund to local financial institutions and then to franchisees; and (ii) capacity building of local stakeholders, including the Fund, the Egypt Franchise Development Association, financial institutions, consultants, lawyers, and the judiciary, with specific support to the Fund’s Franchising Unit. The program will also provide support to franchisors to ensure that sound local and foreign franchise concepts are developed and successfully applied in the Egyptian context. Franchisors will be selected to receive assistance from the Fund on the basis of various eligibility criteria, including their financial means and adherence to sound franchise practices.

The project is in line with the Egyptian government’s Vision 2022, its 5-Year Plan and 10-Point Action Plan, whose objectives include promoting private sector development (including SMEs and franchising) and reducing unemployment.

Overall, the Franchising Program is an initiative with high development impact and high commercial visibility that is expected to create 375 franchise outlets, over 7,000 direct jobs (and a larger number of indirect jobs in the value chain), and will increase the number of SMEs operating in the formal sector. It will also bring technology transfers to SMEs, foster increased productivity and export potential, and thereby increase government revenues.

Conclusion

The AfDB promotes franchising, where appropriate, as a successful SME development model in Africa, given that the franchising model is known for increasing the success rate of start-up businesses. AfDB’s financial support of the Franchising Program in Egypt will fill a gap in the financial services market by providing long-term funding that is not currently available from commercial sources on competitive terms. The AfDB’s participation is vital in this program given the bank’s technical expertise in franchising. Ultimately, it creates the necessary technical and financial comfort for the Social Fund for Development and commercial banking partners to support and promote franchising in Egypt.

If you would like more information about the topics covered in this Alert, please contact your Nixon Peabody attorney or:

 Kendal Tyre at (202) 585-8368 or [email protected]

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