Germany Franchise Market
U.S. companies entering the German franchise market are encouraged to understand German consumer culture.
The franchise industry has had another strong year in Germany. According to the German Franchise Association, sales rose in 2020 by almost 5% to 135€ billion. Since 2015, revenues in the franchise sector have increased by more than 36%. Thanks to its economic strength and high consumer spending power, combined with political stability, a reliable legal system, a skilled labor market, well-developed infrastructure, and geographic advantage, Germany is a top destination for international businesses. To succeed in the German franchise market, here are 5 things to keep in mind:
1. Understand the German Economy
Germany, with a population of 83 million, is the largest economy in Europe and fourth largest in the world. It achieved positive GDP growth every year for 10 years up until 2019. While traditionally the automotive, mechanical engineering, chemical and electrical industries are the main profit generators, growth has also been seen in areas such as senior care and childcare, online education, shipping and logistics, real estate and construction, security, as well as in DIY and outdoor equipment markets. In the Food & Beverage industry, drive in, delivery and takeout services have also become more popular.
Germany does not have a single economic center, making it an attractive market for multi-region development. In the east, Berlin is a vibrant start-up hub. In the center, Frankfurt is the financial heart of Europe. In the north, Hamburg is a media and trade hub, and the south has the strongest purchasing power due to its car and chemical industries.
Despite its economic prosperity, Germany’s future economic outlook is shadowed by the nation’s declining birthrate which will trigger a shortage of workers required to support the pension system. The latest government initiative is to attract semi-skilled workers from emerging markets to fill the growing personnel vacancies at nursing homes.
2. Learn about German Franchise Business and Consumer Culture
Germans favor order, structure, clarity, and risk aversion. They plan in advance and in great detail, in order to have a sense of control and security. Last minute changes or spontaneous drifts are not appreciated, resulting in the stereotype of Germans being stiff and inflexible. These characteristics make Germans optimal investors or partners for the franchising business in Germany, by virtue of lower risk resulting from proven success already accomplished in its home country. American franchisors should not be discouraged if German investors do not seem to react quickly or enthusiastically. Germans are often reserved, and often make business decisions by committee, following lengthy discussions, resulting in slow progress.
American brands are well received in Germany, especially among the younger generation. To understand which sectors, have the greatest potential for franchise investments in Germany, it is important to understand the German way of life and its consumer culture. Germans enjoy a comfortable work-life balance, with 6 weeks of paid annual vacation leave. An average German has up to 10 different insurances covering life, health, employment, properties and other potential hazards and liabilities. Germans spend disposable income on vacation and on hobbies such as fitness, nature, cars, bikes, pets, and DIY home renovations. Organic, locally sourced food is rapidly becoming the norm for environmental and sustainability values.
3. Build your Local Network
Business partners already established in the market have expertise and financial connections. Reaching out to these active players can greatly ease the access into Germany and gain valuable local knowledge of the market. The first place to get a good overview of the market is the German Franchise Association (GFA). The GFA is a private, service-oriented organization that specifically helps franchise concepts with market entry recommendations and even lead generation. Their members benefit from a network of consultants, brokers
and lawyers who can help understand the unique aspects of franchising in Germany, and a platform where franchises can place advertisements for finding the right (master) partners in Germany. Across Germany, industries are extremely organized through their relevant associations, it is therefore recommended that businesses join their relevant professional association to have access to market info and to enhance networking opportunities. An additional option to identify investor prospects is to work with a consultant who specializes in the franchise business.
4. Develop a Market Entry Strategy
Utilize the services and network of the German Franchise Association or find a local partner or consultant to navigate the complex legal, regulatory, and commercial aspects of starting a business in Germany. Choose the optimal type of franchise for your investment based on your risk-reward profile. While establishing a subsidiary requires higher start-up costs and lengthy set-up time, it is more suitable for larger markets and makes the management of the business easier and more efficient. Some successful US franchises have pursued this model in Germany. Their 100% locally owned subsidiary operates their outlets across Germany and enables them to quickly adapt to the German market and respond to customer needs, for example with the implementation of decor and products targeted to German consumer tastes and preferences. A cheaper and faster alternative to entering the German market is via direct foreign franchising. However, this is a less attractive vehicle for German investors. Germans are cautious investors and prefer to see new concepts tested and proven successful in Germany before investing in them, even if a business has already been successful in its home or neighboring country. U.S. franchisors are advised to first set up a subsidiary as a corporate pilot with a German partner and then start franchising.
5. Make Your Brand Visible and Get the Word out
A successful branding campaign in your home country does not translate into success in the German market. The key to success is to localize your product for the target market by taking into consideration the cultural differences and preferences between the United States and Germany. There are a variety of tools that can be used to raise awareness of your brand before looking for a master franchisee, e.g., using online platforms to create awareness of your concept and advertise for investors, inviting consultants and prospective investors for virtual Discovery Days, pursuing a pilot project, hosting pop-up shops, or co-branding with a well-known German brand. Germany is a land of opportunities for new businesses, given sufficient understanding of the market environment and cultural differences.
For additional information, contact Office.Berlin@trade.gov.