The economic and financial analysis of a planned franchise expansion in Italy

Usually the first part of a feasibility plan concerning a franchise expansion project in Italy is an economic and financial analysis. Two of the main elements of such analysis are a good Italian market survey – containing a realistic projection of the franchisor’s expected revenues – and an analysis of the possible changes to the franchise concept. It is necessary to adapt the original elements of the franchise format to ensure it is optimal for Italy, which means analyze carefully Italian customers’ tastes in order to understand what products and services need to be standardized or customized. Franchisors that provide the appropriate mix of customization and standardization create the greatest value to consumers and are therefore the most profitable in Italy.

1. The economic analysis in a feasibility plan

Usually the first part of a feasibility plan concerning a franchise expansion project in Italy concerns an economic and financial analysis. Such analysis includes the following items:

•  a market analysis (general and regional);
• a competitors’ analysis;
•  an analysis about the prices and basic elements of the offer to end customers;
•  an analysis about the profile characteristics of the best franchisee, investments required and economic plan;
• analysis of the geographic scope (where and when will franchises be searched and sold);
• an analysis of the franchise fees, ongoing royalties, payments, structure and implementation of a network marketing fund, of the ongoing support function, etc.
•  an analysis of the franchisor’s costs and revenue estimates.

In particular, in the economic analysis two elements are crucial:

• a good Italian market survey;
•  an analysis of the possible changes to the franchise concept.

2. The market survey

The primary objective of the Italian market survey should be a realistic projection of the franchisor’s expected revenues. To that extent, the major market survey’s items should include:

• a definition of the geographic influence on the market;
•  a review of population trends, demographic features, cultural factors, and purchasing power in the community;
•  an analysis of the competing services in the community (factors to consider include pricing, product lines, sources of referral, location, promotional activities, quality of service, consumer loyalty and satisfaction, and sales);
• a determination of the total volume in the market area and an estimation of the expected market share;
•  an estimation of the market expansion opportunities (e.g., responsiveness to new/enhanced services).

Moreover, the organization and operations of the business should be planned in sufficient depth to determine the technical feasibility and costs of the planned expansion into the Italian market, including:

• equipment;
•  merchandising methods;
• facility location and design or layout;
• availability and cost of personnel;
• supply availability (vendors, pricing schedules, exclusive products etc.);
• overhead (utilities, taxes, insurance).

3. Changes to the franchise concept

An important issue to be analyzed in a franchise feasibility plan economic part is that of the possible changes to the franchise concept.

There is a common belief according to which, for a franchise that has been successful in his country of origin and possibly in other countries, it is sufficient to simply replicate its commercial “proposal”, perhaps with some small adjustments, to be successful also in another country, such as Italy. This is a strategy employed by some companies seeking rapid international growth. But this approach is often incorrect.

Case history is full of failed experiences of franchises that, although based on a success recorded in other countries, have not replicated the same success in Italy – or, in the worst case, faced disastrous consequences and were forced to give up their investments and plans – because they pretended to simply reproduce their franchise concept as it was used in other countries.

In fact, it is unlikely that the key factors of a given commercial formula that has been successful in the U.S., Australia or Thailand can be exactly replicated in Italy, achieving the same success. While the core value proposition the franchise brand offers shouldn’t deviate from what has brought success domestically, adaptations to the Italian market are always necessary, due to numerous differences in areas such as Italian pricing, customers’ tastes and needs, preferences and buying habits, disposable income, demand size etc.

To give a trivial example, Italian consumers’ taste id obviously different from that of the Middle Eastern or Asian countries’, as well as advertising techniques; if a franchise restaurant chain does not modify, to a greater or lesser extent, the ingredients of the menu offered in the US or Australia, or the way restaurants are advertised, it is likely to face problems.

It is therefore necessary to adapt the franchising format from one country to ensure it is optimal for Italy. Of course, this is not an easy task. One of the greatest decisions that a franchise company faces when expanding internationally is determining which elements of their formula should be locally customized and which should remain standardized, reflecting the core elements of the franchise concept, unless the franchise lose its customer appeal and opportunity for further growth.

Franchisors should analyze carefully Italian customers’ tastes in order to understand what products and services need to be standardized or customized. Companies that manage to meet their customer’s expectations by providing the appropriate mix of customization and standardization generally create the greatest value to consumers and are therefore the most profitable in Italy.

 

Avv. Valerio Pandolfini

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The information contained in this article is of a general nature and is not to be considered an exhaustive examination of the various issues, nor is it intended to express an opinion or provide legal advice. Specific legal advice must be provided with regard to individual cases.