EXAMINING THE IMPEDIMENTS TO EFFECTIVE FRANCHISING IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

In the recent decades, foreign markets across the world have opened up and allowed many firms to move from a national scale to competing internationally in other countries. The opening of international open market has made it easy for international firms to look for new markets and opportunities in other countries away from their countries of origin. They have been several factors that have prompted franchisors to pursue the African markets such relaxed trade barriers in some African countries, western market saturation. This has forced franchisors to look for alternate distribution channels for their products and services in African markets. (Kendal H, 2014) Nigeria is often viewed as one of the African markets with growth potential which is why many franchises are setting camp in Nigeria.

Nigeria has been part of the World Trade Organization since 1st January 1995 as a result of the Nigerian trade reforms that started in the 90s. Kiringia (2004) noted that in the Nigerian market, the years after 1990 led to a steady reduction of tariff rates and tarrif bands. This greatly helped Nigeria position itself in the international trade space.

Kiringai (2004) explained in her study that ―From 1990, duty rates on imported raw materials and spare parts were also targeted for reduction so as to reduce the antiexport bias and improve the country‘s competitiveness.‖ One of the ways Nigeria has opened up its market is by imports from international firms by allowing them to set up and operate in Nigeria through various modes one which is international franchising. However, foreign market entry through international franchising is only appropriate for certain kinds of companies. Burton & Cross (1995) stated that ―International franchising is a foreign market entry mode that involves a relationship between the entrant(franchisor) and a host country entity, in which the former transfers, under contract, a business package(or format), which it has developed and owns, to the latter.

Malinda (2016) in her World Bank report noted that increased disposable income amongst the Nigerian population had spiked the consumer expenditure. This means that more people in Nigeria have extra money to spend on food, drinks and shopping. This can also be attributed to the increased construction of shopping malls and recreation facilities that are in most urban areas of Nigeria. Most if these shopping malls have a food court section which in most cases is occupied by one or two fast food franchises. Malinda, C (2016) observed that as a result of this increased consumer expenditure more money and time was being spent by Nigerians on new drinking and eating habits, For example there were more people eating out during lunch breaks and ordering for fast food in the evenings. A factor that has contributed significantly to the growth of the fast food industry in Nigeria. Most fast food restaurants in Nigeria run till late hours because there is a large urban population that prefers to eat fast food as opposed to going home to cook as previously done.

According to the Nigeria Franchise Association data, ―the average startup investment in money and time for a franchise in the food/restaurant industry in Nigeria is US$100,000.‖ Due to the different business operating environments in different countries, organizations have to carefully consider before entering any market. A company may be able to successfully set up and operate in one country but might find it extremely difficult to survive in another country because of the business environment. Some of the factors a company has to consider before going into a new country are its own resources (financial), structures and the country‘s cultural environment. These are the two biggest challenges firms are likely to face when entering a new country.

According to research by Timothy Bates on survival of franchised businesses in the US, after 4 years of operation on 62% of franchised business has survived at the end of the period. According to the British Franchise Association, 50% of franchise systems fail over a period of 10 years. There are many internal and external factors that determine the survival of an international franchise when operating in a host country. Some international firms are able to strategically deal with these factors to operate successfully, but some may not have the capability to survive these factors and end up exiting the host country.

1.2 Statement of Problem

One of the modes of entry into international markets is franchising. Franchising is one of the ways an organization can participate in global trade. Just like all other modes of entry, franchising has several challenges that both the franchisor and franchisee must try and overcome if they are to succeed in the new market. When it comes to the Nigerian market, many franchising have faced the problem of adapting to the market properly. Many franchises assume that the marketing strategies they used in other parts of the world will work in Nigeria. However, the Nigerian market and consumer is very complicated to crack especially when it comes to lifestyle choices such as food.

For example, fast foods such as the popular fish and chicken restaurants (Kenchick) are still far more popular than any international franchise. This can be attributed to the cost of their products. Many franchises have to figure out how to compete with the low prices their competitors offer and still make profits to survive. While the Nigerian middle class is growing and has a considerable amount of disposable income, one has to carefully study the market to understand how to penetrate it. This is where most franchises face problems.

Nigeria‘s GDP increased by 5.9 percent in the first quarter of 2016. According to a report by World Bank, the accommodation and restaurant industry grew by 12.1 percent. Despite its past problems, the last decade has seen Nigeria restore stability to its currency markets and significant structural and economic reforms have contributed to sustained economic growth. This has made Nigeria very attractive for investors. According to the latest report by World Bank, Doing Business in Nigeria index (2015), Nigeria rose 28 places in ease of doing business in Nigeria. This means that businesses are finding it easier to establish in Nigeria but there are still certain regulations and policies that international franchises still have to overcome to be able to compete and operate in the Nigeria market. For example, there are certain labor laws they have to follow that are not necessarily in other countries. They also have to adhere to the city council regulations and food standards which some franchises find restrictive.

With this scenario, many international franchises have found it extremely difficult to survive in the Nigerian market and many of them opt to leave the market. However, there are many franchisees that have managed to study the market and adapt accordingly and have been able to survive the market. This study seeks to identify the challenges franchisees face and how they can overcome them to survive the ever growing Nigerian market. This proposal then aims to answer the question; what are factors (both internal and external) that affect the performance of international food franchises operating in Nigeria?

1.3 Objectives of the study

The main objective of this study was to identify the factors that affect franchising in the Nigerian market.

The study was guided by the following objectives:

i. To identify the external factors that affect the performance of franchises in Nigeria

ii. To establish the internal factors that affect the performance of franchises in Nigeria

1.4 Significance of the Study

The findings of this study will be of benefit to international franchises seeking to set up in Nigeria as it highlights the challenges they are likely to face and how to overcome these challenges. The study will help management and decision makers come up with proper strategies to help them enter and survive in the Nigerian market.

Academics and business researchers will also find this study useful for support literary citations as well as for developing themes for further research. The study hopes to make theoretical, practical and methodological contributions in the international business field. Researchers will be able to use the study to further their study in this area by reviewing the literature and highlighting academic gaps to fill. Franchising is an important strategy when it comes to international trade for Nigeria and this study will provide useful information for government and trade policy makers. From the challenges and recommendations highlighted in this study, policy makers will have information to help them understand what is hindering international trade when it comes to franchising in Nigeria.

1.5 Research Question

1. what is the external factors that affect the performance of franchises in Nigeria?

2. what is the internal factors that affect the performance of franchises in Nigeria?

1.6 Scope/Limitation of the study

The limitation faced by the researcher during data collection was the availability and busy schedules of the managers. Despite the questionnaires being submitted early enough to the mangers, some of the managers filled in the questionnaires hurriedly as the researchers deadline was approaching. This may have affected the study as they did not take time to think through analyze the questions. Another limitation was that the respondents were hesitant to give some information which they considered as sensitive and confidential, hence did not give adequate feedback. As a result, one organization in the census refused to respond to the questionnaires completely.