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Ambassador Richard E. Hoagland: Address to the Astana 2009 Franchising Forum

June 3, 2009
U.S. Embassy
Astana, Kazakhstan

 
Good morning, ladies and gentlemen.  Welcome to the Embassy of the United States of America in Kazakhstan. 

I want to thank Mr. Sedelnikov for an excellent introduction, for laying the basis for what you’ll be doing this morning, for what you’ll be hearing. 

The United States is often seen as the birthplace of franchising, since American franchise brands are well known throughout the world

But the word franchising actually comes from the French word for “freedom.”  This is a good definition, because franchising means freedom – freedom for small business owners.

Many think that franchising is about corporate giants – McDonalds, Starbucks, Pizza Hut, Pepsi, or even Marriott Hotels, which are all over the world.  But franchising is also about small businesses.  And the franchisee is normally a small business, operating under a well-known brand name.

It is this recognized brand name that is often the key to success for small business people.  In the United States, annually, less than five percent of all people who buy a franchise fail in their business. This is compared to the thirty five percent failure rate of non-franchised small businesses.

 
This is good news for those of you who are small businessmen and entrepreneurs.  But more importantly for a nation, franchising is also about economic growth.  It is about small firms that collectively have a very large impact on a national economy.

In the United States, franchising accounts for 11 million jobs, and generates over $280 billion in wages for the American people every year.

Would it surprise you to learn that franchising provides more jobs in the United States than the durable goods manufacturing sector or the financial activities sector?

Franchising also has a strong spin-off job creation factor -- between 1 and 1.5 additional jobs for every one franchise employee.  That equals an additional 10-15 million jobs for the people.
 
Franchised establishments generate over $800 billion of direct economic output, which is over four percent of the private sector economy of the United States.

Including the additional economic activity that occurs outside of franchised businesses because of franchising activities, the overall economic contribution of franchised businesses is $2.3 trillion.

In every line of business, franchising is a major source of jobs and a critical engine of economic growth.

Over the last decade, the output of franchised businesses grew at nine percent per year, expanding at a faster pace than many other sectors of the United States economy.

Discussing the importance of franchising to the United States economy may not seem relevant to the Kazakhstani experience, but the economic impact of franchising is even more significant in emerging markets like Kazakhstan’s. 

Let’s look at Egypt for an example.  Franchising came to Egypt in 1973, and the changes that occurred in the retail business during the 1970s were amazing.

Franchising in the food sector developed quickly.  At first, every ingredient was imported, but after just four years, Egyptian investors began building factories, licensed by the international brands, to provide the inputs for the food industry that had been franchised.

By the start of the 1980s, Egyptian entrepreneurs launched their own chains based on Western standards, and within a few years, an abundance of international and typical Egyptian foods were available to the consumer in hundreds of modern restaurants.

During this time, the economics trickled down to other layers of the economy.

In addition to a growth in food processing facilities, local restaurants renovated their establishments, which resulted in increased demand for building materials.  Small factories developed to produce uniforms for the workers.  Human resource firms created training programs for the service industry. 

Factories became so efficient in the production of quality goods, that after fulfilling local demand, they began exporting their products to countries throughout the Middle East and even into Europe.  As you can see, franchising quickly became a tool for economic growth.

What makes franchising ideal for economic development is that it is really ideally suited to small and medium-sized enterprises, encouraging small business development in every imaginable business sector. 

While there is a common misperception that the franchise fee is too high for small firms, and that a potential franchisee needs a million dollars or more to start a franchise business, in fact, many franchise concepts are as low as $10,000-$20,000, with the majority less than $150,000.

In addition to the obvious economic benefits of employment, output, and tax revenue, franchising development injects expertise and training in various industries and creates the entrepreneurial and managerial capabilities and skills of the labor force.

With its advantages of skills transfer, start-up support, and operational assistance, franchising is rapidly emerging as the preferred type of business to address many of the socio-economic challenges of emerging markets.

Moreover, its lower risk profile offers a safer way of establishing new small businesses and offers a sustainable solution to some of the macroeconomic problems confronting national economies.

Governments and financial institutions have recognized the benefits of franchising, and in many countries are encouraging overseas franchise systems to establish networks in their countries.

Countries such as Singapore and Malaysia, as we will hear later, have very actively supported franchise development for many years, and today government officials in most countries understand the link between franchising and economic prosperity.

During an economic downturn, like we are experiencing now throughout the world, it might not be the best time to discuss new business ventures, some would think.

However, franchising is also more likely to thrive during economic declines.  A variety of reports that were recently released demonstrate that franchising is more likely to succeed during recessions due to a variety of reasons.

In fact, on Sunday, the New York Times newspaper reported that Burger King, and American fast food franchise, has experienced a 35% growth in its business in the last 6 months—which were the most difficult 6 months of the economic downturn. 

The sector grows because people increasingly look at franchising as an alternate means of making a living when there is a reduction in the work force.

Franchises often benefit as hard-pressed consumers increasingly seek more value for their money.

The franchise industry also benefits from the decrease in commercial rentals, especially in shopping centers, which we see to some degree now in Kazakhstan.

Also, most banks are looking for promising businesses to support and they are willing to assist franchisees in whatever ways they can, as long as there is sufficient commitment, proper business planning, and positive cash-flow.

You can already see the beginning of international franchising here in Kazakhstan, with Western brands as have been mentioned, like Pizza Hut, Gloria Jeans Coffee, and TGIFridays, as well as Russian brands like Planeta Sushi and the Patio chain.

This, however, is just the beginning for Kazakhstan.  Franchising can play a much larger and fundamental role in the development of Kazakhstan’s economy, but it will require action on behalf of you gathered here today.

It will require legislative support from the government, and I hope that those of you from the federal and Akimat governments here today pay close attention to the comments later today regarding the Malaysian experience, which has been so successful.

It will require financial support from banks and other investment organizations, and I hope that those of you here today representing the financial sector will leave with new insights on franchising, how you can support it, and how it can benefit your bottom line.

But most of all, it requires the commitment and determination of entrepreneurs, which is where most of you come in.

I wish you today in this forum, that you make the most of the speakers’ expertise, that you learn, that you get new ideas, that you become stimulated and excited to start new businesses, and I wish you the very best of luck in your future. 

Thank you very much.

Ambassador's Remarks