Hot Foreign Markets for Franchise Expansion in 2013
Total Page：16
File Type：pdf, Size：1020Kb
HOT FOREIGN MARKETS FOR FRANCHISE EXPANSION IN 2013 PANEL Robert Shaw Scott Chorna Right at Home International FOCUS Brands Inc. Executive Advisor, International Director of International New Business Business Development [email protected] [email protected] Mike Brennan Ken Levinson DLA Piper LLP Faegre Baker Daniels LLP Partner Partner [email protected] [email protected] 2 WHAT IS A HOT MARKET? • The markets where new franchise agreements are being signed • The markets in which existing brands are expanding rapidly • The markets where existing brands/outlets are enjoying strong performance 3 MARKET FORECASTING METRICS Market Economic Commercial Government Characteristics Indicators Factors Issues Total GDP Population GDP per Capita Ease of Market Political Stability Purchasing Power Entry Demographics Growth Rates Ease of Doing Regulatory Issues Business % Urbanization Inflation Rates Franchise Tax Issues Environment Consumer Spending Economic Stability Brand Viability Corruption Index Levels 4 SOURCES OF DATA • www.imf.org • www.cia.gov – Country Info – Country Reports • www.economist .com • www.franchise.org – World in Figures / – International Section Countries • www.export.gov • www.fraserinstitiute.org – Country Commercial ― Economic Freedom Reports • www.heritage.org – Other Market Reports – 2013 Index of Economic • www.worldbank.org Freedom – Country and Data Bank Sections 5 TYPICAL PROGRESSION OF U.S. FRANCHISES INTERNATIONALLY • Major QSR brands – company owned – YUM!, McDonalds, Starbucks • QSR franchising • Full Service / Fast Casual F&B, • Automotive Services, Business Services, Children’s Education & Professional Training, Specialty Retail • Lodging, Real Estate • Consumer Services – personal and residential 6 7 2012 TOP QSR MARKETS 8 2012 TOP FAST CASUAL AND FULL SERVICE RESTAURANT MARKETS 9 2012 TOP MARKETS FOR SERVICES AND RETAIL 10 FINAL LOOK AT 2012 Middle East Latin America • QSR (Mexico, Chile) • Casual dining • QSR • Home furnishing • Casual dining • Apparel • Apparel Asia Pacific • F&B • Lodging 11 TAX AND LEGAL CONSIDERATIONS TAX CONSIDERATIONS • What are some of the key tax issues when going overseas? – US taxpayers are subject to current US tax on their worldwide income – Is the US franchisor deemed to be “doing business” abroad, or have a “permanent establishment” (nexus) locally? – Does a tax treaty apply? – Are the various fees payable by the local franchisee subject to local withholding tax, and at what rate(s)? – Does the US franchisor/payee have the ability to currently use the foreign tax credits for withholding or other taxes paid abroad? 13 TAX CONSIDERATIONS (CONT.) • Withholding taxes – Collected at the source; depends on definition of taxability under applicable law – Payor acts as collection agent for tax authorities (with independent penalty exposure) – Foreign tax credits available in US for creditable foreign taxes paid or withheld via treaty or local law – A “direct credit” against the US income tax owed by recipient, who must report full amount of income • Example: $100 of royalty income subject to 10% withholding: Franchisor gets $90 in cash (but reports $100 as royalty income) plus a US tax credit for $10 14 WITHHOLDING TAXES (CONT.) – A tax “gross up” puts burden of withholding tax on payor/franchisee • Same Example with gross-up: franchisee pays $111.11 as grossed up royalty, withholds required 10% tax ($11.11) and remits $100 net cash to franchisor; franchisor reports US income of $111.11 and gets a tax credit of $11.11 – Applicable treaty will lower withholding rates from normal law; if no treaty, local law (rates and definitions) apply • US statutory withholding rate is 30% (absent treaty) – “Royalties” - Usually defined to include payments for use or right to use IP in local jurisdiction; treaties and local law provide other terms 15 WITHHOLDING TAX US Treaty Countries Withholding US Treaty Tax on Country Royalties Additional definitions Russia Exempt industrial, commercial or scientific experience (know how) (ICSEx) industrial, commercial or scientific equipment (ICSEq) (10%); patent/TM/copyright, ICSEx (15%) [also includes India 10%/15% fees for “included services”] China 10% ICSEq and ICSEx UK Exempt ICSEx Canada 10%/exempt ICSEx (10%); software (OTHER THAN in connection with Franchise) (exempt) Thailand 5%/8%/15% copyright/use of software (5%); ICSEq (8%); patent/TM/ICSEx (15%) Turkey 5%/10% patent/TM/ICSEx (5%); ICSEq (10%) Chile 2%/10% ICSEq (2%); copyright/TM/patent/ICSEq (10%) – UNDER PENDING U.S. TREATY (NOT YET RATIFIED) Mexico 10% ICSEq and ICSEx copyrights, media productions (10%); patents/designs/processes, knowledge, experience, skill (know how) South Korea 10%/15% (15%) 16 WITHHOLDING TAX Non-Treaty Countries Country General Withholding Tax on Royalties Brazil Local law only -- 15% (Tech Svcs taxed at 25%) Singapore Local law only -- 10% Saudi Arabia Local law only -- 15% Costa Rica Local law only -- 25% UAE Local law only -- 0% Indonesia Local law only -- 20% Chile Local law only -- 30% (pending Treaty to reduce) Colombia Local law only -- 33% 17 PRACTICAL LEGAL CHECKLIST ITEMS • Register your trademark in the target country • Assess the target country risk • Vet your partner • Get to know your partner • Clarify deal terms in some detail early on 18 PRACTICAL LEGAL CHECKLIST ITEMS • Consult target country counsel early on to get the “lay of the land” • Determine if any material legal restrictions or hurdles • Control drafting of the contract • Determine if any registration, disclosure or licensing requirements apply 19 LAWS APPLICABLE TO FRANCHISING (AUG. 2012) Blue = Disclosure Law Green = Relationship Law Red = Disclosure & Relationship Laws Black = Other Europe Central Asia The Americas EU Mongolia Barbados (competition Kazakhstan Asia Brazil law) Kyrgyzstan China Canada Turkmenistan Japan Alberta Within EU Macau New Brunswick Belgium South Korea Ontario Estonia Taiwan Prince Edward Island France The Middle East Vietnam Mexico Lithuania Saudi Arabia United States Italy (commercial Federal Romania agency law) Several States Spain Venezuela (competition law) Sweden South Pacific Australia Non-EU Indonesia Albania Malaysia Belarus Georgia Africa Moldova South Africa Russia Tunisia Ukraine Does Not Include: • Codes of conduct which do not provide for governmental or private enforcement, even if promulgated under governmental authority. • Bodies of law (e.g., competition, intellectual property, etc.) which also cover franchising, unless explicitly mentioned. Copyright © 2011 DLA Piper. All rights reserved. 20 BRIC MARKETS 21 UNDERSTAND THE RISKS • Global Competitiveness Report – Only China is listed in the Top 30 (#29) • Ease of Doing Business Index – China #91 – Russia #112 – Brazil #130 – India #132 • Detailed legal process for franchise registration – Costly and time consuming 22 WORLD RANKING 2012 - WFC Nº COUNTRY TOTAL OF BRANDS 1º South Korea 2.400 2º United States 2.300 3º China 2.200 4º Brazil 2.031 5º India 1.500 6º 95,4%France 1.477 7º Turkey 1.450 8º Japan 1.246 9º Canada 1.200 10º Australia 1.051 Source: WFC 23 COMMON CHARACTERISTICS • Very aggressive and strong positions for large chains usually through direct investments or JV’s – McDonald’s – KFC – Starbucks • Higher expectations for international brands in terms of overall value – Upscale environments of major QSR brands as compared to their US stores 24 WHAT DO YOU LIKE ABOUT WESTERN RESTAURANTS COMPARED WITH CHINESE RESTAURANTS? Clean or better environment 52% Better atmosphere (music, décor, etc.) 46% Better services 40% Try something different 31% Better taste of food 29% Cultural attraction 26% Healthier menu options 19% Dessert and/or beverage options 16% Those Preferring Western Restaurants Cite the Cleaner Environment and Better Atmosphere as Key Differences from Chinese Style Locations 25 COMMON CHARACTERISTICS • Favorable demographics • Rapid growth of shopping malls and “modern retail” • “Regional” specialization • With FOCUS on key major urban centers 26 BRAZIL 27 BRAZIL • Very high import duties • Dominant position of local concepts in franchising • Development of infrastructure with coming of World Cup (2014) and Olympics (2016) • Strong categories – Burgers – Coffee/Café – Frozen Yogurt 28 Ranking 2012: Network Size – FOOD SECTOR Rank Brand Segment Total Units 1 MCDONALD´S Food 1260 2 SUBWAY Food 836 3 BOB´S Food 820 4 CASA DO PÃO DE QUEIJO Coffee, Drinks & Snacks 438 5 GIRAFFAS Food 359 6 HABIB´S Food 344 7 REI DO MATE Coffee, Drinks & Snacks 328 8 KOPENHAGEN Coffee, Drinks & Snacks 296 GRÃO ESPRESSO 9 Coffee, Drinks & Snacks 285 CAFETERIA 10 SPOLETO Food 258 Source: ABF 29 INTERNATIONAL PRESENCE IN BRAZIL 106 Foreign Concepts operating in Brazil Foreign Networks 5,5% 94,5% National Networks 30 RUSSIA • Cinnabon – Started in 2009 – Opened over 90 bakeries in less than 3 years – Master Franchise model with many local sub-franchisees 31 RUSSIA • Currently least developed of the BRIC Markets – Many chains opened in 2011 and 2012 • Very strong McDonald’s market – One of top 10 countries by average sales volume 32 INDIA QSR’S Approx. No. of Expansion Plans Outlets Café Coffee Day 1400 20-25 cafes every month Domino's Pizza 378 500 outlets 2012 McDonalds 200 300 outlets by 2012 Pizza Hut 170 200 outlets by 2012 US Pizza 90 100 outlets by 2012 KFC 107 1000 outlets by 2014 Yo-China 43 200 outlets by 2012 33 INDIA • 95% of fast-food market is “traditional” retail – Huge market to tap – 36% growth in 2012 • Led by big brands • High import duties for almost