Discusses opportunities for U.S. franchisers and legal requirements in the market.
The concept of franchising is quickly gaining acceptance in Pakistan, especially in the hospitality and food service sectors. U.S. companies dominate the franchise market in Pakistan in large part due to the fact that U.S. firms are the pioneers in this sector, and have the strongest marketing to support their brands. Several major U.S. hotel chains, along with a rapidly growing number of major U.S. restaurants and U.S. car rental companies are currently represented in Pakistan through franchisees.
Franchising provides U.S. companies with a quick way to enter the market without major capital commitment. By operating through local franchisees, U.S. firms can gain access to local expertise and significantly reduce the problems of adjusting to an unfamiliar business environment.
However, franchising in Pakistan is not without challenges. Potential areas of dispute between franchisor and franchisee include quality control, intensity of marketing efforts by the local franchisee, and possible conflict of interest on part of the franchisee. The local affiliate may end up as a competitor once the franchise agreement expires or is terminated.
A key consideration in establishing a franchise operation in Pakistan is quality control, particularly if the enterprise proposes to use locally produced items. In Pakistan, all imported food items - particularly meat items - must be certified “halal” (slaughtered in accordance with Islamic ritual). The Government of Pakistan has recently enacted a Special Regulatory Order – SRO 237(1)2019, which proclaims that all products imported in to Pakistan must have their labeling details printed in Urdu along with halal certification from the designated certifying authoritithies. This SRO will be enforced on July 1, 2019.
Prior to entering an agreement with a local company, U.S. firms may perform due diligence by contacting a local U.S. Export Assistance Center (USEAC) and purchasing the International Company Profile service, offered by the U.S. Commercial Service. Before selecting a partner, U.S. firms are advised to identify a number of candidates and evaluate each carefully.
Certain exchange regulations of the State Bank of Pakistan (SBP) also pose a challenge to the growth of this sector. One major stumbling block is the Central Bank’s guidelines on commercial remittances which limits the initial franchise fee up to $100,000 (regardless of the number of outlets) for the duration of the franchise. Similarly the SBP also limits the continuing franchise fee to five percent of their monthly net sales, which may suppresses franchisor profits.
Furthermore, Pakistan’s energy crisis and less developed processed food market (meat, chicken, poultry) also pose a challenge to the franchisees where they mostly rely on the import of major ingredients.
In spite of these challenges, international franchisers are seriously considering this market - where competition and labor costs are low and profit margins are still high. Major U.S. companies with franchise operations in Pakistan include Marriott, Days Inn, Best Western, Ramada, 4 Points by Sheraton, Pizza Hut, KFC, Subway, McDonald’s, Dunkin Donuts, Domino’s Pizza, Papa John’s Pizza, P.F. Chang’s, Hardees, Fat Burger, Nike Retail, UPS, FedEx, Princeton Review, Berlitz, Gymboree, TCBY, Cold Stone Creamery, Hertz and Avis. Most franchise operations have concentrated their activities around Karachi and Lahore; however some of the food outlets have opened branches in Hyderabad, Faisalabad, Islamabad, Rawalpindi, Multan, and Peshawar.