International brand expansion – Q&A on Middle East franchising

05 May 2014

The Middle East is a hugely popular destination for businesses and brands to expand into. Which are the key Middle East markets?

The UAE is often looked at as being the first market to open in when businesses are looking to expand to the Middle East as the UAE is seen as a hub for the region. Qatar (due to the World Cup 2022) and Saudi Arabia (due to its relatively large population) are also key targets.

What sectors have witnessed the most significant growth and influx of 'Western' brands?

The sectors which have witnessed the greatest growth in the UAE and GCC markets include hotels, food and beverage and fashion retail. Coffee chains such as Tim Horton, Starbucks and Costa Coffee have been very successful, together with many UK high street brands including New Look and Topshop, US brands such as Gap and Banana Republic and the European brand H&M.  It has been estimated that 50% of all international brands are already in the UAE and in the process of expanding to surrounding countries through either existing or new franchise partners. 

What are the headline commercial attractions for businesses expanding into the Middle East?

Recently, the UAE and Qatar markets were upgraded to emerging market status which could result in an inflow of hundreds of millions of USD.  Further, growth in in-bound investments as a result of the UAE Expo 2020 and Qatar 2022 World Cup events and non-oil business growth is predicted to be at 4.8% (UAE) and 10% (Qatar), compared to global economy predictions of 3.6%.

Economic data has shown that profitability of franchised outlets is usually much higher in Middle East markets than in a franchisor’s home country outlets. There is a high demand for Western brands and individuals in the region have high disposable incomes, with 60% of the population under the age of 25.

What routes to market are businesses using to enter the Middle East?

The Middle East has proven to be very fertile ground for brands looking to expand via franchising.  Traditional franchise models including development franchising – (where the brand owner grants a Middle East entity the rights to use its brand and know how to develop the branded businesses throughout the region), and master franchising (where the brand owner grants a Middle East entity the right both to use and sub-license the brand and know how to develop the branded business in the region) - have proven popular.

Increasingly, more sophisticated structures such as subordinated equity arrangements, "manchised" relationships and hybrid structures are being used and developed to provide additional income streams and layers of control for the brand owner.

What are the legal challenges facing businesses looking to expand via franchising into the Middle East?

The greatest challenge to expanding via franchising in the Middle East is the lack of legislation dealing directly with franchising.  There have been calls by some interested parties in developing a franchising law, but at this stage no drafts have been submitted. This presents an opportunity for those brands prepared to work with specialist advisers adept at building commercially robust franchise agreements and with knowledge of the Middle East legal systems. 

While there is at present no franchise legislation, which is the same as the position in the UK, there is a significant body of case law surrounding agency law.  Brands looking to expand via franchising, or indeed distribution and agency, will therefore need to structure their relationships carefully so as not to be disadvantaged by the laws relating to agency.

Authors

Murray-Melissa

Melissa Murray

Partner
United Arab Emirates

Call me on: +971 26108 100